Step 7.Investitsionnaya Dow strategy

Step 7.Investitsionnaya Dow strategy

Editor Note:
We have already published the article "Dow Dividend Strategy," six months ago. But, given the remoteness of the publication and not wanting to interrupt the series of "steps", we offer you another material on the subject. So, you are one step closer to success:
"To get the required rate of return due to" Dow-portfolio "must be not more than fifteen minutes per year, no research materials and a copy of" The Wall Street Journal "; it requires alower commission, involves minimal risk, brings an average annual rate of return, three times the yield the average mutual fund, and requires for its realization is nothing but your phone or a modem to connect to the broker with a very low commission. " - The Motley Fool Investment Guide
So "Step 4" was to convince you that index funds are the most useful invention since perhaps that of soap, but if you can achieve better results than they? Want better results? The only investment decision - investment in an index fund - can bring you higher returns than 80% or 90% of all other mutual funds, and perhaps that is all you want, or you can make in their investment activities. But we can do better. Then, of course, require more work. About 15 minutes a year, but once you get into the main idea.
Think about this: if you can annually exceeds the average yield of at least 2%, after 25 years the amount in your account will be approximately 50% higher. It's - the magical effect of compound interest. Of course, exceed the market by 2% annually for 25 years - no easy task. Most mutual fund managers would sell their own grandmother for a record. And this guarantee is not, but if you study the history of investing with this strategy, you'll see that over the past 25 years, she has brought profitability, which exceeds the average at a much more substantial amount. (Indicators of progress made in the past are no guarantee of future results, please keep this in mind all the time.)
This strategy is called by the source of its origin, the site The Motley Fool: Foolish Four. It is one of the Dow Dividend Strategy. In fact, all strategies Dow surpassed market dividend of 3% or more over the past 25 years. Foolish Four strategy we like more than others, because it combines excellent yield with relatively low risk.
One catch: since all of these strategies involve the sale of shares each year, their use will need to pay an annual tax on capital gains, if you do not use a special account, subject to tax relief. Holding shares in an index fund or simply buying and holding stocks for years will bring income not taxable annual capital gains tax, so the Foolish Four strategy will work best if you use the account type of IRA, rather than ordinary investment account.
Once again, let us explain - the strategy is working and using an ordinary taxable account, but it loses some of its advantages over the long-term strategies to "buy and hold". If you have a pension or regular investment account, make sure that the strategies that require more frequent transactions of sale, you use the retirement account.
Using Dow-investment strategies, you limit your choice of investment group of companies that demonstrate financial strength, achieved leadership in its sector (and, in fact, a world leader) and are the most blue of all the blue chips. If you choose this group of several companies, which on average outperformed the rest of the group, you can make high profits at low risk and outperform the market without spending many hours studying the financial statements of each company, competitive environment and the competence of management. So, how do you select those few companies that will surpass all the others? Now we will explain. First, let's look at the whole group.
Naturally, we are talking about the index Dow Jones Industrial Average (DJIA). A lot of people do not even know that the famous Dow actually includes only 30 companies. That is, 30 companies representing the U.S. industry. In order to get to the index Dow, a company must be a leader in its industry, financially stable, etc. - We have already mentioned this above. The idea is that the companies included in the index Dow, can survive hard times (we hope so very, otherwise the strategy would not work), but at the same time, they have the resources, expertise and general acceptance, to safely through most of all storms. Their condition can deteriorate for a while, but they rarely are able to collapse.
Secret (actually, not so very secret) Success strategies Foolish Four, and of all strategies Dow-investment is the dividend yield. This - a key measure to help select those few stocks that are undervalued compared to other stocks Dow, but at the same time, still financially strong. Dividend yield is the annual dividend divided by current share price. This is - akin to an interest rate action. (Dividend yield, of course, is only part of income you get from owning a share. Investors also expect the price of their shares will increase and will bring them good capital gains. Dividends plus capital gains constitute gross income on the shares.)
Offer may lose favor with investors for many reasons - competition, a large trial, the global financial instability, low profits, etc. This, of course, leads to a drop prices because some investors are generally inclined to panic and sell shares, if short-term prospects look attractive. While these investors believe the stock is sinking, we say that it came up for sale.
As long as the company continues to pay its regular dividend, this price decline leads to an increase in dividend yield. (Remember that the dividend yield = dividends / price). And as long as the company is able to stand on solid financial ground and is able to survive this storm (which is why we limited the choice companies of the Dow), a higher dividend yield will be attract investors, which will lead to an increase in the share price, and thus, the action live for the next stage of the cycle, when its price increases, and soon again to reach the general location. The essence of our progress is to catch the action before it starts to recover, in other words, when the yield is still high and the price is still low.
Of course, not always things are going exactly according to this scenario. Some stocks may not recover for years, and some companies get into such serious trouble that are forced to reduce dividend payments, causing their stocks are falling even lower. Such is the nature of investment. Get used to it.
However, in order to make this strategy work, it is not necessary to buy the best stocks or shares, will certainly avoid the losers, you just need to choose three or four stocks with above-average rates for several years and do it constantly, year after year. This is all that is required of you, and this alone will bring you a killer income.
The main thing - to choose these few stocks. To do this you need three things: a list of the current composition of the index Dow, dividend yield of these stocks and their current prices. All these figures are widely known, you can find them in any kind of financial publications or on a set of Internet sites.
There are three basic variations on the Dow-dividend strategies. The first of these is known as the "10 best returns," and is just to buy 10 stocks with the highest dividend yield (in dollar terms, not in fractions of shares) and keep them for a year. At the end of the year to revise its statistics to sell the shares that are not more in the top ten and replace them with those who bring the best dividend yield at the moment. Just? From 1974 to 1998. This approach has brought the average annual return of 17.95%, significantly higher than the results of many professional financial managers. In dollar terms, investment portfolio of $ 10,000 would have grown over the 25 years up to $ 620 000. Compare this figure with the average yield of Dow: it was for the same period, 15.03%, which would increase the same $ 10,000-ny portfolio only to $ 330000.
The second variation, popularized by Michael O'Higgins in his book (Michael O'Higgins) "Surpassing the Dow" (Beating the Dow), is called "Surpassing the Dow 5" (Beating the Dow 5, BTD5). In this case, you start with the same 10 stocks of the "10 best returns," but only five are buying the cheapest of these ten. For many years this strategy has been proven that buying the cheapest of the 10 stocks improves the profitability of the strategy, not adding to it a substantial risk. Over the past 25 years the strategy has brought BTD5 yield at the rate of 19.39%, turning every $ 10,000 investment made in 1974, more than $ 800,000 by the end of 1998
Nevertheless, we like most about strategy Foolish Four, which combines stunning high returns with low investments risky. For its implementation is required to choose only four stocks from the Dow, so she called the Foolish Four.
Stocks for Foolish Four strategies are selected based on the relation between dividend yield and stock price. The exact formula is the dividend yield divided by the square root of the share price. Calculating this ratio for all 30 stocks from the Dow, you make a list of shares, starting with the highest value and to the lowest. Stocks Foolish Four - it's shares from the second to fifth position in this list. (The very first action from the list we do not buy, because it indeed can expect a very bad time. Too high dividends and low price too - sometimes it's too much good.) Buy these four stocks, hold them a year and then change on a new set, selected by the same method. For 25 years, from 1974 to 1998, this strategy has an annual income of 24.55%, which would make the portfolio from $ 10,000 to more than $ 2.4 million
But maybe you want to do something more interesting than the mere use of low-risk, confirmed by years of strategy? Want to learn more about a company that interests you? Proceed to "Step 8".