How to Implement a Dow Dividend Strategy

There are two basic ways to execute a Dow Dividend Strategy: 1) Buy a Unit Investment Trust from a broker, or 2) Trade for Yourself in brokerage account. Some of the pros and cons of each approach are:

Unit Investment Trust (UIT): These are pools of securities (stocks in the Dow Jones Industrial Average in this case) that in effect collect money from individuals, buy the stocks in the strategy, and after a period of time, sell the stocks and distribute the proceeds to the individual investors. Such pools are passively managed in that no adjustments are made to the portfolio after the stocks have been purchased. Typically, the UITs using a Dow Dividend strategy buy the ten highest yielding Dow stocks at the end of a month and hold them for one year. If you are interested in a UIT, you will probably have to contact a "full service" broker such as Merrill Lynch or Dean Witter. It is also possible that discount brokers that offer more than the basic services, such as Schwab or Fidelity, may also sell UITs. However, the costs are probably the same no matter which broker you use. (These names are provided for illustrative purposes and should not be considered as a recommendation to use a particular brokerage firm.) You pay an up-front fee when you buy a UIT, which is typically 2 to 3% of the amount invested.

Advantages of UITs include:

Disadvantages of UITs include:

Trade for Yourself: Obviously, you will need a brokerage account to place your trades. Experienced investors who do their own research and make their own decisions are best off using brokers who charge the lowest commissions. There are numerous advertisements in financial publications and on CNBC that can be used to generate a list for additional inquiries. The Internet is also a source of leads for brokers. An investor who has never had a brokerage account and wants to get started with a Dow Dividend strategy may want a broker with a local office that can provide guidance in filling out the forms and a personal broker to answer questions. Several discount brokers, such as Waterhouse, Schwab, and Fidelity, have offices in the larger metropolitan areas. These firms and others also have a wide selection of mutual funds that can be bought and sold with no transaction fees should the investor wish to diversify in this manner. The advantages and disadvantages of UITs discussed above are respectively disadvantages and advantages of doing your own trading.

Additional potential advantages of trading for yourself include:

There is at least one potential additional disadvantage to doing your own trading:

Recommendation: If you have less than $10,000 available for investment according to a Dow Dividend strategy, buy a unit investment trust. If you have $10,000 or more, open an account with a deep deep discount broker and make your own trades. If you have $10,000 and use a strategy involving five stocks (such as BTD5), and if the broker charges $20 per trade, then the commissions for one year will be $200 ($20 x 2 x 5), which is 2% of your capital. If you are more aggressive and use the MF4 strategy, which involves four stocks, then the commissions are about 1.6%. Assuming that you will continue using the strategy for more than one year and that some stocks will be holdovers (which is quite likely), if you do not rebalance at the end of the year, then your commissions will be a smaller percentage over time. If you have more to invest, say $20,000 or more, than my preference would be to use the two year combined strategy that calls for investing approximately equal dollar amounts in each of the stocks in the combined current year and prior year BTD5 lists. Do not worry about buying "odd lots" (other than a multiple of 100 shares) since there is no longer any penalty or execution disadvantages for such trading.

As explained elsewhere, the best time to execute these strategies is right around the beginning of the year. If it is late in the year, say after August, I would just wait to get started. If you do the calculations, you may be able to see that some stocks are virtually certain to be part of your strategy, so you can buy them whenever you think is a good time. (Example: After the market takes a sharp drop or even "crashes." November 1987 would have been a great time to start buying.) If you are using the two year combined strategy, you will already know five of the stocks for the portfolio: those on the current year's BTD5, which will be next year's prior year list! Earlier in the year, you could buy based on the current rankings and calculations. Another possibility, which is attractive if the market is down so far in the year, is to buy the stocks you would have bought at the beginning of the year. That way your results will be better than if you had started at the beginning of the year according to your chosen strategy. There is no magic right answer. The important thing is to formulate a plan and then stick with it for several years. Doing so should enable you to realize the benefits from following one of the Dow Dividend strategies.

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