Money Management Q&A
Q: Is investing in the so-called Dogs of the Dow a good strategy? If so, are there any mutual funds that follow it?
A: The answer to your first questions depends on what you're comparing and when. The strategy involves buying the 10 highest-yielding stocks in the 30-stock Dow Jones Industrial Average at year-end and updating this portfolio annually. (The stocks are called dogs because their high yields are often due to their depressed market values.) For the period from 1971 through 1995, the Dogs' annualized return of 17 percent (including reinvested dividends) beat the 12 percent chalked up by both the DJIA and the Standard & Poor's 500 Stock Index. From 1996 through 1998, though, the Dogs' 20 percent annualized return trailed the DJIA and the S&P 500, which returned 24 and 28 percent, respectively. Through Nov. 11, 1999, the Dogs' 5 percent return (without dividends) fell short of the DJIA's 14 percent and the S&P 500's 12 percent.
Mutual funds are prevented by SEC restrictions from investing more than5 percent of their assets in any one stock initially, so they can't holdas few as 10 stocks. But three no-load funds put half their stake into the10 Dow Dogs. The other half may go into Treasury securities (Hennessy BalancedFund, 800-966-4354), into the S&P 500 Index stocks (Payden & RygelGrowth and Income Fund, 800-572-9336), or into various high-yielding issues(O'Shaughnessy Dogs of the Market Fund, 877-673-8637).
Unlike mutual funds, unit investment trustsoffered by most major brokeragefirms and some discounters, such as Charles Schwaballow you to acquirea portfolio consisting entirely of the Dow Dogs. However, these UITs haveonly a one-year life span, so you must roll over your investment annually,if you want to continue using the strategy. You pay a front-end load (around1 percent) only once, but ongoing deferred sales charges and administrativefees add up to about 2 percent a year.
You could, of course, buy the stocks directly, but then you'd have tokeep track of them on your own and pay individual commissions on purchasesand sales.
Q: Our corporation's 401(k) plan permits employees to defer the maximum amount of salary allowed by law. Since the 1999 limit is $10,000, can someone earning $35,000 put in that much?
A: No. In addition to the $10,000 limit ($10,500 in 2000), an annual contribution ceiling of 25 percent of salary applies. For this purpose, "salary" is compensation before subtracting the deferred amount. The most the employee could put in is $8,75025 percent of $35,000.
Q: In a recent column, you wrote that a minor can contribute up to $2,000 of work earnings to a Roth IRA annually. But since Roth contributions are supposed to be taxable, would they be allowed only if the child's earnings exceed the standard deduction? Also, do contributions to an education IRA for a minor reduce the permissible Roth IRA contributions for the same year?
A: No to both questions. Roth contributions aren't deductible, so they can't be used to decrease taxable income. But the mere fact that someone's income is too low to be taxed doesn't bar a Roth contribution. A child with 1999 income of as much as $4,300 ($4,400 in 2000) solely from employment would owe no tax but could put up to $2,000 of earnings into a Roth account. Contributions made by the child or someone else to an education IRA wouldn't lower that ceiling.
Lawrence Farber. Money Management.