The Fool School

What’s easier than the TV Guide crossword, more dependable than rain when you don’t have an umbrella and able to leap market averages in a single boumd? It’s the Dow Dividend Approach(DDA), also known as “Beating the Dow” of the “Dogs of the Dow.”

With a simple formula, the DDA selects downtrodden Dow stocks likely to rebound. Over the last 36 years, its picks have outperformed not only the Dow, but also the Standard & Poor’s500 and most mutual funds. The proof is in the numbers. Whereas the Dow cumulatively gained5,477% between 1961 and 1996, variations of the DDA returned 15,316% to 32,659%.

Plus, it’s simple. Experiments at Fool Labs have verified that a 9-year-old can find the correct stocks in a mere half-hour.

Here’s what you do. Look at the Dow 30 list below, which is ranked according to the dividend yield (annual dividend divided by current share price.) The 10 with the highest yields represent the 10-stock variation of the approach which has risen an average of 16% peryear in the last 36 years. If you take the five lowest-priced among the 10, you’ve got the five-stock variation, averaging 18%. Also of this writing, the current five are Philip Morris, AT&T;, Exxon, DuPont and Sears.

With either approach, you buy equal dollar amounts of each stock. An even better-performingvariation is what we call the “Foolish Four,” which takes the stocks in the five-stock approach and tosses out the lowest-priced stock, doubling up on the second-lowest priced one. It has generated a 22% average annual return since 1971.

Traditionally, you’d hold the stocks for a year and a day and than repeat the process, selling whichever stocks are no longer in the group and buying any new ones. Recent tax law changes and some emerging research suggest that investors might be best off holding for 18 to 24 months now, instead of a year. The Dow Dividend Approach is a simple and powerful taste for any portfolio. Read more about it in Michael O’Higgins’ book “Beating the Dow” (HarperPerennial, $13) or at our Web site, where we list the selected stocks daily at https:llwww.fool.com/dow.htm.