August 2020 – Changes to Dow and the HYD Strategy

The composition of the Dow Jones Industrial Average (“the Dow”) has been changed. This will affect our hypothetical high yield Dow (HYD) investment strategy, though investors who follow the approach need not take action until the model’s next trading date (September 15).

Charles Dow created the index in 1896 as a simple index based on the average of the share prices of 12 firms that he believed to be representative of major industries. The index now includes 30 such companies, determined by Dow Jones Indices, LLC. On August 24 Exxon Mobil, Pfizer and Raytheon Technologies were dropped from the index, while Salesforce.com, Amgen and Honeywell International were added.

The changes were made to ensure that information technology stocks would be adequately represented in the index following Apple Inc.’s decision to split its stock 4:1.
While Apple remains in the index, the split serves to reduce the Dow’s exposure to technology. The changes in the lineup aim to offset that reduction.

Though Exxon Mobil will disappear from the Dow on August 31, these shares will be incrementally eliminated from the model over the following 18 months, beginning
September 15. The deletion of Exxon Mobil is likely to reduce the HYD model’s average yield while broadening its industry diversification. The firm currently has the highest indicated dividend yield (over 8 percent) in the Dow. Together with Chevron these oil giants comprise nearly one third of the model’s value. This is far higher than the energy sector’s 4.6 percent market cap representation among U.S. large cap value stocks.

As Exxon Mobil is sold out of the model, its proceeds will be reinvested among the four highest-yielding stocks within the Dow each month. Barring significant share price changes it appears Verizon or Walgreen’s Boots Alliance would join that list in September. Investors who follow the model can simply match the value weightings we publish each month (see page 62).

Also In this Issue:

Who Bears the Burden of the Dollar’s Falling Purchasing Power
Claiming Social Security
A Reader Inquires
The High Yield Dow Investment Strategy
Recent Market Statistics
Dow Jones Industrial Average Ranked By Yield
Asset Class Investment Vehicles