Takeaways
- The Dow Jones Industrial Average index contains 30 blue chip stocks and is price weighted.
- The Dow Jones Industrial Average has had a 10% rate of return over the past decade.
- The Dow Jones Industrial Average has been around for over 125 years.
- The Dow Jones Industrial Average is one of the most watched indexes in the world because it acts as a proxy for how well the overall US stock market is performing.
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What is the Dow Jones Industrial Average?
The Dow Jones Industrial Average, or DJIA, is a highly prominent price-weighted stock market index of 30 well-established publicly traded companies. The companies in the DJIA, or “the Dow” as many financial analysts and media correspondents often refer to it, are from a variety of sectors of the economy except for utilities and transportation.
As an indicator of the health of the United States stock market, the DJIA is one of the most followed stock indexes in the world and includes household company names like Apple, Nike, and McDonald’s. All companies listed on the DJIA are from the New York Stock Exchange (NYSE) or the NASDAQ.
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What Does Price-Weighted Mean?
The DJIA is a price-weighted index. This means that the index is calculated by adding the price per share of all listed companies' stock included in the index dividend by a common divisor, which is the total number of companies in the index. This means that the higher-priced stocks in the DJIA have a larger impact on the DJIA’s movement than the lower-priced stocks.
The reason the DJIA was created as a price-weighted index was because Dow Jones & Company wanted to make the index simple for investors to understand. At the time of the index’s inception, stock investing was not as widespread as it is today.
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History of the DJIA
The Dow Jones Industrial Average was launched by Dow Jones & Company on May 26, 1896. The first DJIA originally contained only 12 stocks from the industrial sector and was meant to represent major areas of the United States economy at the time. The index grew to host 20 companies in 1916 and finally reached its current form of listing stock from 30 companies in 1928.
Although there has been company turnover in the DJIA, the index still only includes stock from 30 companies. Since its inception, the DJIA has been bought and sold several times. Dow Jones Industrial Averages are currently owned by a joint venture between the CME group and S&P Global.
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Smart Tip:
Unlike the S&P 500, the 30 stocks listed in the DJIA rarely change. Additions and deletions only take place occasionally.
Companies in the DJIA
The eligibility criteria for a company to be in the DJIA are high and based on qualitative factors. Inclusion in the DJIA is determined by the Index Committee, which is composed of five members, two representatives from The Wall Street Journal and three from the S&P Dow Jones Indices. The Index Committee regularly evaluates current and prospective members of the DJIA to ensure that the companies listed adequately represent different sectors.
Below are some of the eligibility criteria for companies in the Dow Jones Industrial Average:
- Company Reputation: Maintains an excellent reputation.
- Company Growth: Companies must have a high and sustained growth level.
- Investor Interest: High interest among a large number of investors.
- Company Headquarters: Must be headquartered and incorporated in the United States (traded on either the NYSE or NASDAQ)
- Revenue Criteria: Plurality of revenues come from the United States.
While these criteria help the Index Committee vet potential new companies, it also allows them to monitor the actively listed companies. Companies in the Dow Jones Industrial Average don’t change on a cadenced basis but on an as-needed basis based on the Index Committee’s decisions. For example, the most recent changes were on August 31, 2020, when Salesforce, Amgen, and Honeywell were added to the index in exchange for ExxonMobil, Raytheon, and Pfizer. Here is the current list of 30 companies included in the DJIA:
| Number | Company | Ticker |
|---|---|---|
| 1 | 3M Co | MMM |
| 2 | American Express Co | AXP |
| 3 | Amgen Inc | AMGN |
| 4 | Apple Inc | AAPL |
| 5 | Boeing Co | BA |
| 6 | Caterpillar Inc | CAT |
| 7 | Chevron Corp | CVX |
| 8 | Cisco Systems Inc | CSCO |
| 9 | Coca-Cola Co | KO |
| 10 | Dow Inc | DOW |
| 11 | Goldman Sachs Group Inc | GS |
| 12 | Home Depot Inc | HD |
| 13 | Honeywell International Inc | HON |
| 14 | Intel Corp | INTC |
| 15 | International Business Machines Corp | IBM |
| 16 | Johnson & Johnson | JNJ |
| 17 | JPMorgan Chase & Co | JPM |
| 18 | McDonald’s Corp | MCD |
| 19 | Merck & Co Inc | MRK |
| 20 | Microsoft Corp | MSFT |
| 21 | Nike Inc | NKE |
| 22 | Procter & Gamble Co | PG |
| 23 | Salesforce Inc | CRM |
| 24 | Travelers Companies Inc | TRV |
| 26 | UnitedHealth Group Inc | UNH |
| 26 | Verizon Communications Inc | VZ |
| 27 | Visa Inc | V |
| 28 | Walgreens Boots Alliance Inc | WBA |
| 29 | Walmart Inc | WMT |
| 20 | Walt Disney Co | DIS |
Source: CNBC, As of June 2023
Historical Rate of Return
The inflation-adjusted return on investment over the past decade, including dividends, for the DJIA is approximately 14%. As an investor, it is important to remember that stock returns vary so you can’t expect to receive a return of 14% consistently.
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For example, in 2021, the annual total return for the DJIA was up over 18%, while in 2022, it was down 22%. These fluctuations should be expected, as the overall index tracks the broader market, which ebbs with economic cycles.
Investing in the DJIA has been lucrative for investors over the long term. If you participate in your employer-sponsored 401(k) account, you probably are investing in some portion of the DJIA. As one of the most followed financial indexes, the DJIA is often part of investing for retirement.
Can You Buy The DJIA?
While you cannot buy the DJIA directly, you can buy exposure to the 30 stocks through other investment vehicles. Because the DJIA is an index or a collection of public equities that change in composition, you can’t buy the DJIA. Luckily, investment firms have created exchange-traded funds (ETFs) to capture the index’s returns with these low-cost investment vehicles. Portfolio managers have created these funds to mirror the current composition of the DJIA.
Here are a couple of Smart Money’s favorite ETFs that track the DJIA:
- SPDR Dow Jones Industrial Average ETF (DIA)
- Nationwide Dow Jones Risk-Managed Income ETF (NDJI)
- ProShares Ultra Dow30 (DDM)
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Other Major Stock Indexes
Many major stock indexes track the overall economy as well as various sectors of the United States economy. Here are three additional stock market indexes that track the health of the United States economy.
- S&P 500: The S&P 500 is probably the first most known broad-based US economy index. This index is a curated list of 500 large capitalization companies listed on US stock exchanges.
- NASDAQ Composite: This index tracks stocks traded on the NASDAQ stock exchange on a market capitalization-weighted basis. Not all companies in this index are based in the US, and the NASDAQ is known for its heavier tilt toward technology stocks.
- Wilshire 5000: This index tracks thousands of publicly traded companies in the US, and its goal is to capture all the public companies on a market capitalization-weighted basis.
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Smart Summary
Investing in the Dow Jones Industrial Average can provide your portfolio exposure to blue-chip companies in the United States equities market. As a stock investor focused on the long-term success of your portfolio, DJIA ETFs can be easy and low-cost vehicles to get started investing. Investing in the DJIA index or individual listed companies can be a cornerstone of your overall investing strategy.
