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Philip van Doorn

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Nov. 9, 2019, 10:15 a.m. EST

This simple stock investing strategy combines value, quality and dividends into a winning formula

A venerable index has been outperforming other value strategies in recent years

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By Philip van Doorn, MarketWatch


PBS/Courtesy Everett Collection
Here’s your winning recipe.

Value stocks have underperformed growth stocks by a wide margin during the extended bull market.

When this briefly reversed during September, Morningstar did a three-part study of data going back to the 1990s — another period when growth was riding high and value lagged. Its analysts then narrowed their focus to the best-performing value strategies of the past three years and came to a fascinating conclusion.

For large-cap stocks, Morningstar found that tracking the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.79%  not only delivered better returns than other value strategies over the last three years but it also performed well versus growth strategies for other, longer periods.

Growth’s triumph

You may already know that value indexes and the funds that track them have lagged growth indexes and funds since the stock market hit bottom in March 2009, in the wake of the global financial crisis. One big reason is that the value group excludes many of the large technology companies that have increased their sales and earnings exponentially, leading to much better investment returns even though they have traded at much higher ratios to earnings, book value and sales.

Amazon.com /zigman2/quotes/210331248/composite AMZN +0.66% is an excellent example — the internet retail pioneer’s shares trade for 66.5 times the consensus earnings-per-share estimate for the next 12 months, based on analysts polled by FactSet. That compares to a forward price-to-earnings ratio of 17.4 for the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.86% . Over the past 10 years, Amazon’s shares have often traded at much higher forward P/E than they do now. But the stock was up 1,407% for the decade through Nov. 1. 

S&P Dow Jones Indices divides the benchmark S&P 500 into value and growth indexes, based on price valuations to earnings, book value and sales. Here’s how ETFs that track those two indexes, the full S&P 500 and the Dow have performed over the past 10 years:


FactSet

It’s no surprise that the Vanguard S&P 500 Growth ETF /zigman2/quotes/200197877/composite VOOG +0.59%  has been the best performer among the four during this strong decade for growth strategies, with the Vanguard S&P 500 Value ETF /zigman2/quotes/201497396/composite VOOV +1.15% lagging far behind. But the SPDR Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA +0.80%  was only slightly behind the SPDR S&P 500 ETF Trust /zigman2/quotes/209901640/composite SPY +0.86% . What’s remarkable about that is that the Dow represents a value portfolio — a much more conservative group of companies than the heavily tech-weighted S&P 500.

And now to value

Tom Lauricella and Katherine Lynch of Morningstar pointed out that before the dot-com bubble began to burst in 2000, growth stocks had also outperformed value for years. While that and signs of slowing economic growth might make you think it’s a good time to switch to value, the writers cautioned that the current situation is different because “many of the technology stocks that have led the long-running bull market are real companies with real earnings.”

That said, what value strategies have been best in recent years? According to Lauricella and Lynch, there has been one main theme: “Value funds that focused on higher-quality companies” tended to perform best, especially those that “focused on dividend-paying companies.” They listed the 10 best-performing value-focused mutual funds and exchange traded funds over the past three years, and the winner was the SPDR Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA +0.80% .

Let’s return to our group of four ETFs shown in the 10-year chart above, now for three years through Nov 1:


FactSet

Once again, the Vanguard S&P 500 Growth ETF leads, but by less than 1 percentage point over the SPDR Dow Jones Industrial Average ETF.

When considering that it is an index made up of 30 of the best-known U.S. companies, including a lot of slow-growers, many of which feature attractive dividend yields, the Dow’s performance has been incredible. And if you now are looking to move more of your money into a more conservative value-oriented, dividend-focused strategy, this is the simplest and the best-performing value index fund among those tracked by Morningstar. And its annual expense ratio is only 0.17%.

The Dow 30

Here are the 30 components of the Dow Jones Industrial Average sorted by three-year total returns (with dividends reinvested) through Nov. 1:

Company Ticker Total return - 3 years Dividend yield Forward price-to-earnings ratio
Boeing Co. /zigman2/quotes/208579720/composite BA 161% 2.38% 20.2
Microsoft Corp. /zigman2/quotes/207732364/composite MSFT 154% 1.42% 26.4
Apple Inc. /zigman2/quotes/202934861/composite AAPL 141% 1.20% 19.8
Visa Inc. Class A /zigman2/quotes/203660239/composite V 126% 0.66% 28.9
Home Depot Inc. /zigman2/quotes/208081807/composite HD 112% 2.29% 22.3
JPMorgan Chase & Co. /zigman2/quotes/205971034/composite JPM 100% 2.82% 12.5
Caterpillar Inc. /zigman2/quotes/203434128/composite CAT 90% 2.85% 14.0
UnitedHealth Group Inc. /zigman2/quotes/210453738/composite UNH 89% 1.71% 15.8
American Express Co. /zigman2/quotes/203805826/composite AXP 88% 1.44% 13.8
McDonald's Corp. /zigman2/quotes/203508018/composite MCD 86% 2.58% 22.7
Nike Inc. Class B /zigman2/quotes/203439053/composite NKE 86% 0.99% 29.2
Walmart Inc. /zigman2/quotes/207374728/composite WMT 82% 1.80% 23.6
Intel Corp. /zigman2/quotes/203649727/composite INTC 77% 2.23% 12.4
Cisco Systems Inc. /zigman2/quotes/209509471/composite CSCO 69% 2.98% 14.4
Procter & Gamble Co. /zigman2/quotes/202894679/composite PG 57% 2.41% 23.8
Merck & Co. Inc. /zigman2/quotes/209956077/composite MRK 56% 2.59% 16.1
United Technologies Corp. /zigman2/quotes/203237915/composite UTX 54% 2.00% 17.6
Walt Disney Co. /zigman2/quotes/203410047/composite DIS 50% 1.33% 24.8
Verizon Communications Inc. /zigman2/quotes/204980236/composite VZ 45% 4.07% 12.1
Coca-Cola Co. /zigman2/quotes/209159848/composite KO 41% 2.97% 23.9
Pfizer Inc. /zigman2/quotes/202877789/composite PFE   38% 3.75% 14.4
Travelers Companies Inc. /zigman2/quotes/206313935/composite TRV 32% 2.51% 12.4
Goldman Sachs Group Inc. /zigman2/quotes/209237603/composite GS 28% 2.30% 9.4
Johnson & Johnson /zigman2/quotes/201724570/composite JNJ 23% 2.90% 14.9
Chevron Corp. /zigman2/quotes/205871374/composite CVX 23% 4.10% 17.8
3M Co. /zigman2/quotes/205029460/composite MMM 12% 3.39% 18.6
International Business Machines Corp. /zigman2/quotes/203856914/composite IBM 1% 4.78% 10.5
Exxon Mobil Corp. /zigman2/quotes/204455864/composite XOM -6% 5.00% 21.4
Walgreens Boots Alliance Inc. /zigman2/quotes/203410933/composite WBA -25% 3.19% 10.1
Dow Inc. /zigman2/quotes/203121064/composite DOW N/A 5.35% 13.8
Source: FactSet

You can click the tickers for more about each company.

To read the Morningstar report in full, see the first section for long-term data that explains periods of outperformance for growth strategies . The second section shares insights from value managers , and the third part lists the best-performing value funds over the past three years.

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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
28,132.05
+220.75 +0.79%
Volume: 277.74M
Dec. 12, 2019 4:55p
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/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 1,760.33
+11.61 +0.66%
Volume: 3.10M
Dec. 12, 2019 4:15p
P/E Ratio
77.94
Dividend Yield
N/A
Market Cap
$867.01 billion
Rev. per Employee
$359,671
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,168.57
+26.94 +0.86%
Volume: 2.22B
Dec. 12, 2019 4:55p
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/zigman2/quotes/200197877/composite
US : U.S.: NYSE Arca
$ 170.84
+1.01 +0.59%
Volume: 110,781
Dec. 12, 2019 8:00p
loading...
/zigman2/quotes/201497396/composite
US : U.S.: NYSE Arca
$ 124.39
+1.42 +1.15%
Volume: 114,483
Dec. 12, 2019 8:00p
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/zigman2/quotes/208954582/composite
US : U.S.: NYSE Arca
$ 281.95
+2.23 +0.80%
Volume: 3.79M
Dec. 12, 2019 8:00p
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/zigman2/quotes/209901640/composite
US : U.S.: NYSE Arca
$ 317.13
+2.71 +0.86%
Volume: 96.59M
Dec. 12, 2019 8:00p
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/zigman2/quotes/208954582/composite
US : U.S.: NYSE Arca
$ 281.95
+2.23 +0.80%
Volume: 3.79M
Dec. 12, 2019 8:00p
loading...
/zigman2/quotes/208579720/composite
US : U.S.: NYSE
$ 346.29
-3.71 -1.06%
Volume: 5.98M
Dec. 12, 2019 6:30p
P/E Ratio
53.11
Dividend Yield
2.37%
Market Cap
$196.98 billion
Rev. per Employee
$660,961
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/zigman2/quotes/207732364/composite
US : U.S.: Nasdaq
$ 153.24
+1.54 +1.02%
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P/E Ratio
28.86
Dividend Yield
1.33%
Market Cap
$1157.29 billion
Rev. per Employee
$902,473
loading...
/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 271.46
+0.69 +0.25%
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P/E Ratio
22.90
Dividend Yield
1.13%
Market Cap
$1203.10 billion
Rev. per Employee
$1.98M
loading...
/zigman2/quotes/203660239/composite
US : U.S.: NYSE
$ 182.64
+0.63 +0.35%
Volume: 11.19M
Dec. 12, 2019 6:30p
P/E Ratio
35.61
Dividend Yield
0.66%
Market Cap
$319.68 billion
Rev. per Employee
$1.25M
loading...
/zigman2/quotes/208081807/composite
US : U.S.: NYSE
$ 212.04
+0.04 +0.02%
Volume: 9.92M
Dec. 12, 2019 6:30p
P/E Ratio
21.08
Dividend Yield
2.57%
Market Cap
$231.26 billion
Rev. per Employee
$261,993
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/zigman2/quotes/205971034/composite
US : U.S.: NYSE
$ 138.02
+3.84 +2.86%
Volume: 13.73M
Dec. 12, 2019 6:30p
P/E Ratio
13.62
Dividend Yield
2.61%
Market Cap
$420.85 billion
Rev. per Employee
$497,647
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/zigman2/quotes/203434128/composite
US : U.S.: NYSE
$ 146.78
+2.78 +1.93%
Volume: 3.72M
Dec. 12, 2019 6:30p
P/E Ratio
13.95
Dividend Yield
2.81%
Market Cap
$79.58 billion
Rev. per Employee
$526,173
loading...
/zigman2/quotes/210453738/composite
US : U.S.: NYSE
$ 283.61
+3.11 +1.11%
Volume: 3.00M
Dec. 12, 2019 6:30p
P/E Ratio
20.62
Dividend Yield
1.52%
Market Cap
$265.75 billion
Rev. per Employee
$754,157
loading...
/zigman2/quotes/203805826/composite
US : U.S.: NYSE
$ 122.64
+2.00 +1.66%
Volume: 2.94M
Dec. 12, 2019 6:30p
P/E Ratio
14.83
Dividend Yield
1.40%
Market Cap
$98.72 billion
Rev. per Employee
$733,559
loading...
/zigman2/quotes/203508018/composite
US : U.S.: NYSE
$ 196.31
+1.59 +0.82%
Volume: 3.02M
Dec. 12, 2019 6:30p
P/E Ratio
25.78
Dividend Yield
2.55%
Market Cap
$146.64 billion
Rev. per Employee
$100,120
loading...
/zigman2/quotes/203439053/composite
US : U.S.: NYSE
$ 97.72
+0.54 +0.56%
Volume: 4.76M
Dec. 12, 2019 6:30p
P/E Ratio
36.53
Dividend Yield
1.00%
Market Cap
$151.70 billion
Rev. per Employee
$529,466
loading...
/zigman2/quotes/207374728/composite
US : U.S.: NYSE
$ 119.76
+0.76 +0.64%
Volume: 4.15M
Dec. 12, 2019 6:30p
P/E Ratio
23.92
Dividend Yield
1.77%
Market Cap
$337.62 billion
Rev. per Employee
$223,654
loading...
/zigman2/quotes/203649727/composite
US : U.S.: Nasdaq
$ 57.55
+0.48 +0.84%
Volume: 27.90M
Dec. 12, 2019 4:00p
P/E Ratio
13.51
Dividend Yield
2.19%
Market Cap
$248.25 billion
Rev. per Employee
$659,665
loading...
/zigman2/quotes/209509471/composite
US : U.S.: Nasdaq
$ 45.67
+1.39 +3.14%
Volume: 27.07M
Dec. 12, 2019 4:15p
P/E Ratio
18.20
Dividend Yield
3.07%
Market Cap
$187.85 billion
Rev. per Employee
$684,933
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/zigman2/quotes/202894679/composite
US : U.S.: NYSE
$ 124.57
-0.09 -0.07%
Volume: 5.90M
Dec. 12, 2019 6:30p
P/E Ratio
83.05
Dividend Yield
2.40%
Market Cap
$310.88 billion
Rev. per Employee
$727,304
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/zigman2/quotes/209956077/composite
US : U.S.: NYSE
$ 89.57
+0.59 +0.66%
Volume: 6.55M
Dec. 12, 2019 6:30p
P/E Ratio
25.03
Dividend Yield
2.72%
Market Cap
$226.54 billion
Rev. per Employee
$615,159
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/zigman2/quotes/203237915/composite
US : U.S.: NYSE
$ 149.41
+2.14 +1.45%
Volume: 2.72M
Dec. 12, 2019 6:30p
P/E Ratio
25.24
Dividend Yield
1.97%
Market Cap
$127.11 billion
Rev. per Employee
$277,021
loading...
/zigman2/quotes/203410047/composite
US : U.S.: NYSE
$ 147.76
+0.17 +0.12%
Volume: 7.76M
Dec. 12, 2019 6:30p
P/E Ratio
21.23
Dividend Yield
1.19%
Market Cap
$266.02 billion
Rev. per Employee
$295,532
loading...
/zigman2/quotes/204980236/composite
US : U.S.: NYSE
$ 61.17
+0.09 +0.15%
Volume: 8.57M
Dec. 12, 2019 6:30p
P/E Ratio
15.71
Dividend Yield
4.02%
Market Cap
$252.61 billion
Rev. per Employee
$905,626
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/zigman2/quotes/209159848/composite
US : U.S.: NYSE
$ 54.14
+0.19 +0.35%
Volume: 11.23M
Dec. 12, 2019 6:30p
P/E Ratio
30.16
Dividend Yield
2.96%
Market Cap
$231.15 billion
Rev. per Employee
$506,342
loading...
/zigman2/quotes/202877789/composite
US : U.S.: NYSE
$ 38.54
+0.32 +0.84%
Volume: 12.73M
Dec. 12, 2019 6:30p
P/E Ratio
13.48
Dividend Yield
3.74%
Market Cap
$211.51 billion
Rev. per Employee
$580,595
loading...
/zigman2/quotes/206313935/composite
US : U.S.: NYSE
$ 135.61
+0.98 +0.73%
Volume: 1.07M
Dec. 12, 2019 6:30p
P/E Ratio
15.22
Dividend Yield
2.42%
Market Cap
$34.75 billion
Rev. per Employee
$996,151
loading...
/zigman2/quotes/209237603/composite
US : U.S.: NYSE
$ 226.05
+4.86 +2.20%
Volume: 2.98M
Dec. 12, 2019 6:30p
P/E Ratio
10.11
Dividend Yield
2.21%
Market Cap
$78.32 billion
Rev. per Employee
$1.34M
loading...
/zigman2/quotes/201724570/composite
US : U.S.: NYSE
$ 141.34
+0.36 +0.26%
Volume: 5.01M
Dec. 12, 2019 6:30p
P/E Ratio
26.93
Dividend Yield
2.69%
Market Cap
$371.04 billion
Rev. per Employee
$603,509
loading...
/zigman2/quotes/205871374/composite
US : U.S.: NYSE
$ 118.81
+2.58 +2.22%
Volume: 6.47M
Dec. 12, 2019 6:30p
P/E Ratio
17.04
Dividend Yield
4.01%
Market Cap
$219.78 billion
Rev. per Employee
$3.27M
loading...
/zigman2/quotes/205029460/composite
US : U.S.: NYSE
$ 168.56
-0.18 -0.11%
Volume: 2.87M
Dec. 12, 2019 6:30p
P/E Ratio
20.03
Dividend Yield
3.42%
Market Cap
$97.03 billion
Rev. per Employee
$350,368
loading...
/zigman2/quotes/203856914/composite
US : U.S.: NYSE
$ 135.32
+1.56 +1.17%
Volume: 4.82M
Dec. 12, 2019 6:30p
P/E Ratio
15.73
Dividend Yield
4.79%
Market Cap
$118.46 billion
Rev. per Employee
$208,845
loading...
/zigman2/quotes/204455864/composite
US : U.S.: NYSE
$ 70.34
+1.38 +2.00%
Volume: 17.07M
Dec. 12, 2019 6:30p
P/E Ratio
20.49
Dividend Yield
4.95%
Market Cap
$291.78 billion
Rev. per Employee
$3.93M
loading...
/zigman2/quotes/203410933/composite
US : U.S.: Nasdaq
$ 58.58
+0.57 +0.98%
Volume: 3.14M
Dec. 12, 2019 4:15p
P/E Ratio
13.63
Dividend Yield
3.12%
Market Cap
$51.51 billion
Rev. per Employee
$380,198
loading...
/zigman2/quotes/203121064/composite
US : U.S.: NYSE
$ 54.45
+1.35 +2.54%
Volume: 2.88M
Dec. 12, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
5.14%
Market Cap
$39.37 billion
Rev. per Employee
N/A
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Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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