Originally created 02/24/03

Credit unions have many advantages



Q: My new employer offers a credit union. What are credit unions and what advantages do they offer over banks? What are their disadvantages?

A: Credit unions are nonprofit, cooperative financial institutions owned and run by their members.

Their biggest advantage is that they typically charge less for loans and pay higher interest rates on savings than banks do. Unlike banks, credit unions don't exist to generate profits for their private owners or public shareholders. Also, credit union operations are exempt from federal taxes although customers, known as shareholders, must pay tax on the interest they earn.

"Overall, credit unions are a really good deal," said Laura Bruce, senior reporter at Bankrate.com, an online publication covering interest rates.

Banks' advantage is convenience. They typically offer much broader networks of branches and automated teller machines. They also offer a bigger array of products such as investment services. And banks often will give more favorable rates to customers who use more than one of their services.

"Customers need to ask what kind of variety (of services) they are looking for," said Charlotte Birch, spokesman for the American Bankers Association, an industry trade group. "They really have to identify their needs."

Ms. Birch said customers should compare what credit unions offer with rates and services offered by their local banks.

Most credit unions are offered through employers but people can join one through other avenues. Some job-based credit unions accept employees' family members. Some religious organizations, unions and trade associations also have credit unions. The Web site of the Credit Union National Association, a trade group, offers a locator service so people can find a credit union nearby.

Q: I'm looking to buy some stocks, and I keep hearing about an investment strategy called "Dogs of the Dow." What's the theory, and does it really work?

A: "Dogs of the Dow" offers investors a simple strategy of picking out-of-favor stocks in the Dow Jones industrial average. But while the dogs have generally done well since 1973, financial advisers caution there is no surefire way to outperform the market.

Popularized by Michael O'Higgins in his 1991 book Beating the Dow, the dogs strategy calls for buying at the start of the year equal amounts of the 10 Dow stocks with the highest dividend yields. A list can be found on the Web site dogsofthedow.com, which is updated regularly.

For investors who don't want to buy 10 stocks, they can get the "Small Dogs of the Dow," which are the five companies with the lowest stock prices from the list of 10 dogs. Mr. O'Higgins found in his book that both types of dogs outperformed the Standard & Poor's 500 between 1973 and 1990.

After a year, investors adjust their portfolios to include just the current dogs by selling off the Dow stocks with lower yields and replacing them with higher ones.

The idea is that companies with higher yields are in a down cycle and thus are cheaper relative to their blue chip peers. After a year, companies will likely turn their performance around, leading to higher stock prices, while investors enjoy rich dividends in the process.

"By investing in the higher-yielding stocks, you're often doing what a value investor would do - you're looking for company stock prices which have been beaten down to a low level," said Eric Tyson, a financial counselor and author of Investing for Dummies.

"In the 1990s, it would have steered you away from technology stocks, most of which had low or no dividends. That's the logic behind it," he said.

Indeed, the dogs in 2002 so far have lost 10.6 percent, and the small dogs dropped 11.5 percent, outperforming the Dow decline of 15.1 percent and the S&P 500 loss of 22 percent, according to dogsofthedow.com.

But over five years, which included the late 1990s tech boom, when growth stocks surged, the large and small dogs underperformed, returning only 7.7 percent and 7.5 percent, respectively, compared with a 12 percent gain for the Dow and 12.4 percent climb for the S&P 500.