But it is reminder never to be lulled by the idea that there are some household-name companies that are so obviously great that there it is safe to hold their individual stock, as part of a big core holding of just two or three great stocks.
In 1999, in their book Dow 36,000, Glassman and Hassett went beyond giving a mathematical demonstration of why the Dow was certain to reach 36,000 before 2005. They also recommended three specific stocks that "illustrate the Dow 36,000 theory in practice." Chosen according to criteria like "1) show consistent increases in earnings, 2) high growth in earnings, 3) high profit margins, 4) low debt, 5) managers who own stock," they identified GE, Microsoft, and Tootsie Roll as the three to buy. Since then, of the three, only Tootsie Roll has outperformed the S&P 500, and not by much. Of GE, they said "GE is increasing its dividends at twice that pace... [in mid-1999] it was by our conservative standards trading two-thirds below its perfectly reasonable price."
But let's look specifically at GE (orange), compared here to the S&P 500 as represented by the Vanguard 500 index fund (blue, VFINX) and the Dow (green, as represented by the DIA). In all cases, dividends are included. The starting point is the publication of Dow 36,000. If you push it back to 1976, GE doesn't look that bad.
As you see, starting from the publication of the book, GE (orange, and includes dividends) briefly outperformed the S&P (represented here, in blue, by VFINX, the S&P 500 index fund); it plunged 77% in 2008--much worse than the S&P. Up until the end of 2016, it paralleled the S&P without making up any of the lost ground, and during 2017 it has lost 33% while the S&P was gaining 17%.
Someone who invested $10,000 in GE on 6/30/1999 and reinvested dividends today has $9,744.
Now, the green line represents the DIA ETF, which tracks the DJIA; again, reinvested dividends are included. A portfolio corresponding to the Dow has in fact slightly outperformed the S&P 500 (and, yes, had a higher risk-adjusted return as measured by the Sharpe ratio.) I don't think DIA as one's big core stock holding, or any other portfolio of 15-30 individual stocks, is a good idea, but it's certainly not crazy
My point is if you have decided that there is something to the strategy of investing in dividend stocks, or blue chips as a category, and diversifying widely within that category, fine. It's not Boglehead orthodoxy, but it's defensible.
- do not allow yourself to be lulled into the idea that there are certain household-name companies that are just so obviously "great companies" that their individual stocks are perfectly safe.
- Do not convince yourself that their safe dividends are a substitute for bonds.
- Do not try to improve your returns by focussing your holdings into a handful of two or three great companies, whether it be "Dogs of the Dow" or "FAANGs" or "GE, Microsoft and Tootsie Roll."
- Do not let anybody brush off single-stock risk by saying "Come on, Apple" (or GE or Eastman Kodak or Sears... which indeed haven't gone anywhere, other than down in price... or Pan American World Airways, American Motors, and Digital Equipment Corporation, which have...) "isn't going anywhere."