The Exclusive Club of Large Caps
Picture one of these clubs where only the real heavyweights need apply. From the library the old aristocrats, General Motors and JP Morgan, are dozing in their leather seats. On the patio, a late luncheon is underway for people who have just improved their standing through union. ExxonMobil and Citigroup are a part of the celebration. At the bar, lots of the"nouveau riche" have assembled - Microsoft appears to be purchasing for Intel and Hewlett Packard. Welcome to the world of the Large Cap Stock Club, the largest of those worlds publicly traded businesses.
For those interested in applying, membership involves a minimum market capitalization of $1 billion and can go upwards to $10 billion based on whom you speak to. Contained in the resumes are often affiliations with other recognized groups. 30 are now with the Dow Jones Industrial Index and a lot more with the Standard and Poor's 500. These two groups are widely followed indicators of the health of the stock exchange.
The Dow Jones Industrial Average (DJIA) traces its lineage back to 1928 when firms like Victor Talking Machine (later merged into RCA Corp.), Nash Motors (later merged into American Motors) and F.W. Woolworth Company kept company with General Electric and General Motors, the only two remaining original members. Today, household names such as McDonalds, Home Depot, Disney and Wal-Mart have substituted some of the earlier brethren. Calculating the average is accomplished by adding the costs of the 30 stocks and dividing by an adjusted denominator.
Since the Standard and Poor's 500 Index (S&P 500) has 500 companies in the index, many consider this to be a more accurate indicator than the DJIA. Also unlike the Dow Jones Industrial Index, the S&P 500 is a weighted index - meaning each stock's weight is determined by its market value.
Unofficially, some Big Cap companies are called"blue chips". This term originally came from poker chips in which the blue chips were the most expensive. Now, this generally denotes high quality, usually being reserved for big companies with steady earnings and a history of dividend growth.
Investors in mutual funds are apparently big fans of Big Cap stocks. Of the 10 largest mutual funds, seven are spent primarily in US Stock and All them (Development Fund of America, Investment Company of America, American Funds, Washington Mutual, Dodge & Cox Stock, Fidelity Contrafund, Fidelity Magellan, and Vanguard Index 500) are Large Cap funds.
One might believe that, with these pedigrees, the sphere of large caps might be scandal free, but with the recent lessons learned from Enron and WorldCom, we understand that even the mightiest can fall from their lofty perches. Once more, we're reminded that when it comes to investing, there are not any guarantees.
Taking a look at yields (using the yearly yields of this S&P 500 from 1926 - 2004, including reinvestment of dividends ) we discover the best year for Big Caps was 1933 with a yield of +53.99%. On the other hand, two decades before that, in 1931, the yield was a gloomy -43.34%. Of the 78 years between 1926 - 2004, the S&P 500 posted positive returns for 56 of the years.
To put it another way, therehave been over twice as many years as there were years. Obviously, this is all past track record. The future holds no guarantees that this will last.
Turning again to Big Cap mutual funds, it's important to remember that many are"managed" funds, instead of"unmanaged" funds such as the S&P 500 Index. This simply means that most mutual funds have managers who pick certain stocks from the large cap universe instead of follow an index of the whole universe. This not only generates return differences between the capital and the indicators, but also creates differences between the capital also.
It might also be a great idea to confirm the dividend history of funds. Although some funds specifically buy stocks with greater dividends, other funds could care less what dividends are paid. Usually, stock based mutual funds will pay dividends once a year (usually in December), but occasionally pay more frequently. In any case, the quantity of dividends can be significant depending on the demand for income.
Clearly, large companies should not be the only asset class considered for a well rounded portfolio. Mid-size businesses and small-size organizations are important to attain proper asset allocation. But for investing in well known companies which are truly the"movers and shakers," nothing beats the Large Cap Stocks.