MEASURING THE PERFORMANCE OF STOCK GROUPS FOR SUCCESS

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

If you invest in stocks, it's simple enough to determine whether a particular stock has performed well. Measuring the performance of a group of stocks, however, is more difficult.

One of the most common yardsticks used to measure stock performance is the Dow Jones Industrial Average; the goal of many professional money managers is to meet or beat the performance of the Dow. What exactly is the Dow? The DJIA is an average of the prices of 30 major companies that are stocks listed on the New York Stock Exchange. The Dow uses a weighted number that takes into account stock splits and dividends when determining the index's movement. Companies listed on the Dow Jones Industrial Average include McDonald's, Coca-Cola, Wal-Mart and Goodyear Tire.

Unfortunately, matching the performance of the DJIA is easier said than done. Although many money managers spend endless hours researching and painstakingly selecting stocks, they still often fail to meet or exceed the Dow.

There is, however, an investment strategy that historically has outperformed the Dow Jones Average more often than not. Best of all, this strategy is simple enough to be followed by any investor. Here's how it works.

Step One: Prepare a portfolio-planning worksheet by listing all 30 stocks included in the Dow Jones Industrial Average. List them from highest to lowest in terms of dividend yield. This information can be obtained from the financial page of any newspaper.

Step Two: From this list, select the 10 stocks with the highest dividend yield, and invest an equal amount of money in each. Now congratulate yourself; you've just bought some of the biggest and most well-established corporations in the world at a value price! Usually, stocks that have a high dividend relative to their prices are either out of favor or undervalued.

Step Three: Repeat the process each year at a set time. Adjust the stocks in your portfolio as necessary, making sure that the stocks included in the portfolio have the highest dividend relative to their prices.

How well does this strategy work? History has shown the 10 highest dividend-yielding stocks have typically provided investors with above average total returns. In fact, this strategy has outperformed the Dow Jones Industrial Average 14 of the past 20 years. For example, a hypothetical $10,000 investment made Jan. 1, 1975, and held through Dec. 31, 1994, would have grown to $293,153. This investment assumes that all dividends and other appreciation during a year were reinvested at the end of the year. Also, the cost of commissions, custodial fees and income tax are not included in the end value of this investment. Why is this strategy so successful? It works well for several reasons. First, the companies listed on the Dow are well-established and financially sound. This gives them stability and staying power even during economic downturns. Thus, it is unlikely the companies in which you invest using this strategy will go out of business. Second, the 10 highest-yielding stocks are typically companies that have been temporarily undervalued by the marketplace. Therefore, if these companies rebound, they are likely to provide you with an above-average total return.

Third, this strategy buys quality stocks that are out of favor. This "contrarian" discipline has historically yielded above-average returns for equity investors.

Although this strategy is not infallible historically it has been quite successful, and it appears this strategy will work with foreign indexes as well. If you're considering investing in foreign stocks, this strategy provides a simple way to add global diversification to your portfolio.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.