American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Apr. 2004 – Tweaking the Dow

On April 8 the 30 component companies of the venerable Dow Jones Industrial Average (DJIA) were changed for the first time since 1999. Eastman Kodak, AT&T, and International Paper were dropped while Pfizer, Verizon and American International Group (AIG) were added. Although two of the firms that were replaced were in our high-yield Dow model, the changes will not necessitate any drastic action on the part of investors who follow our methodology.

The editors of the Wall Street Journal try to maintain the DJIA as an index that will remain a legitimate proxy for the broader market. They focus, therefore, on providing a selection of firms that are representative of the overall U.S. economy. Most recently healthcare (Pfizer) and finance (AIG) have grown increasingly important in the economy, while industries such as basic materials (International Paper) have become less important.
Two stocks that are being dropped from the index are currently in our high-yield Dow model; Eastman Kodak accounts for roughly 12 percent of the model’s value, and AT&T 18.6 percent. However, the change will not generate a sudden shift in holdings. We will simply continue to sell off Eastman Kodak month-by-month, a process begun in the fall when the firm cut its dividend sharply. AT&T will be sold off month-by-month as well, beginning in August, 18 months after it was first purchased. Verizon immediately moved into the four highest yielding stocks in the Dow, and is now included in our recommended high-yield Dow portfolio (see table on page 30). High-yield Dow investors should make their first purchase this month.

We remain optimistic regarding the model’s prospects. While “value” investing has returned to favor in general, the recent change in the tax law has generated a great deal of interest in high-yielding stocks in particular, and we think the tax break is likely to prompt more firms, including those in the DJIA, to increase their payouts.

Also in This Issue:

Taxing Capital Gains: What’s Next?
Quarterly Review of Investment Policy
A Reader Inquires
The High-Yield Dow Investment Strategy
Recent Market Statistics