The Dow Jones Stocks are one of the most quoted indexes in the world, and are often used as a barometer of not just the US economy, but to an increasingly large extent the world economy. But the Dow Jones wasn’t always this important.
Dow’s Early Start
The origins of the Dow Jones Industrial Average were at the end of the 19th Century when Charles Dow, the founder of the Dow Jones & Company, created the index to measure and track the value of just 12 stocks from the best industries in America.
While this wasn’t the first of Charles Dow’s indexes, it became the best known and has influenced Wall Street, Main Street and Washington for more than a century since its creation.
While the formula is something of a complexity and is based on the Dow Divisor (currently approx. 0.13231925), the index is referred to as an average of the price of the components. The math involved is statistical, and perhaps a little obscure.
Currently, the DJIA consists of 30 stocks, all of which Successful-Stock-Trading will be examining in the coming months. So readers will be able to follow up on some of the highlights of each company’s history, current situation, and performance.
The Components of the Dow
The Components, 30 in all, are listed below. Please note that the list contains all the current members, but that from time to time the actual composition of the Index may vary.
|American Express||AXP||Consumer finance|
|Bank of America||BAC||Banking|
|Boeing||BA||Aerospace and defense|
|Caterpillar||CAT||Construction and mining equipment|
|Chevron Corporation||CVX||Oil & gas|
|Cisco Systems||CSCO||Computer networking|
|ExxonMobil||XOM||Oil & gas|
|The Home Depot||HD||Home improvement retailer|
|IBM||IBM||Computers and technology|
|Johnson & Johnson||JNJ||Pharmaceuticals|
|Kraft Foods||KFT||Food processing|
|Procter & Gamble||PG||Consumer goods|
|United Technologies Corporation||UTX||Conglomerate|
|Walt Disney||DIS||Broadcasting and entertainment|
Recent additions to the index in the past two years include: Kraft Foods, Inc. after it was spun off from Philip Morris (aka Altria). Travelers Companies and Cisco Systems in 2009 replaced two venerable names from the list: General Motors and Citibank.
Investing with the Dow
There are quite a few strategies to investing with the Dow Jones stocks: from buying individual components to buying the entire index in an ETF.
There are several ETFs that aim to match the price movement in the Dow Jones. One popular choice is the Diamonds ETF, first introduced in 1998 from a family of ETFs known as SPDRs. I’m currently holding some Diamonds in my stock account, and regularly get updates and dividends paid out (usually monthly).
You can also buy DJIA ETFs that promise to either match the daily performance of the index or do the exact opposite upto 300% of the change.
There are other strategies that involve buying a weighted short list from the components that are undervalued, and holding them with their more generous dividends payouts and potential for price increase in the stock value.
Dogs of the Dow
One of the most famous of these strategies is the Dogs of the Dow first made popular by Michael O’Higgins in 1991.
It goes thus: Investors in the Dogs of the Dow strategy believe that large companies do not often vary their dividend simply to reflect current market values, and that the dividend is akin to a measure of the value of the company’s worth. In contrast, the stock price itself can vary considerably through the business cycle.
Therefore, dogs of the dow investors will buy those that are relatively undervalued by stock price, and will receive more upside potential as well as a reasonable regular and stable dividend. Rinsing and repeating the process will lead to higher longer term returns than just buying the full index.
Of course, events in 2009/10 have proved that even substantial companies, like Citibank, GM, and others can find themselves undergoing exceptionally bad cycles in which bankruptcy (as in GM’s case) becomes the only way to save the company.
In those extreme cases, stock investors usually lose their shirts. Fortunately, this higher risk usually rewards more patient investors as well. If you are interested in finding out more about this way of investing, check out the Dogs of the Dow Website which has very complete stats and information on current incumbents.
Updates: Coming through 2010
I’ll be expanding this page and its related content on a regular basis as I find more information and products. I’ll also be updating the list of Dow Stocks, too. So do remember to bookmark this page, and check back each month or so.