Know What “The Dow” Really Is?

By moneygodmother

The Dow is up, the Dow is down. But what does that really mean for an investor or your 401K….and what is “The Dow” anyway? Is it another name for the stock market?

Like most, you’ve probably heard reports that The Dow has tumbled from it’s all-time high or has been fairly volatile lately. There’s been a big, big drop in a very short time. Is this abnormal? Should we freak out? Is it a bear market?

First, What is The Dow?

We hear daily reports on The Dow — when the stock market opens/closes, as prices change during a trading day, when the market makes big swings up/down. So you might assume The Dow = the stock market? It does not.

Actually The Dow is a set basket of stocks designed to represent the thousands of publicly traded companies comprising the U.S. stock market. The Dow is the industry nickname given to this market basket. It’s formally called The Dow Jones Industrial Average (DJIA), and it’s also referred to as a market “index” now.

How The Dow Began

Devised by Charles Dow between 1885-1896, The Dow originally began as a simple benchmark to help investors gauge the stock market’s performance and make sense of stock price fluctuations – a thermometer of sorts. He first tracked a group of transportation stocks (primarily railroads since that was the booming business of the day), then added industrial companies in the 1890s as America’s industrial scene exploded. The first group became the Dow Transportation Average and the expanded group was the precursor for today’s Dow Jones Industrial Average, or DJIA.

To calculate the DJIA, Mr. Dow and his statistician friend Edward Jones focused on the 12 growth stocks of the time. This basket of stocks originally included General Electric, Laclede Gas, American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, National Lead, North American, Tennessee Coal and Iron, U.S. Leather and U.S. Rubber. The men simply added up the price for one share of each stock and divided by 12 to calculate the daily average for the Dow “index” and show how it moved day to day.

Dow Still Popular Benchmark

So The Dow became the most popular index and a standard to measure the market for:

1. those reporting on the economy, particularly with short, daily sound bytes,
2. professionals who track the markets and study economic trends, because it has a long, consistent history as an index,
3. investors and financial advisors who still use it to gauge market progress and volatility (as Mr. Dow intended), and
4. investors looking to measure better than the average – to beat The Dow.

These reasons continue to make DJIA the popular benchmark.

Time Changes Dow 30 Industry Basket

So you don’t recognize the companies Mr. Dow first selected? The DJIA looks far different today, but still marks the average price of stocks selected (subjectively) by editors at The Wall Street Journal. Among the world’s most widely held, most influential stocks, these 30 powerhouse stocks are also known as “blue chip” stocks. They are cream-of-the-crop companies with great track records for outperforming. Currently, all 30 DJIA stocks are dividend payers.

For about the last year, the DJIA includes: 3M, American Express, Apple, Boeing, Caterpillar, Chevron, Cisco Systems, Coca-Cola, Dow (Chemical), Exxon Mobil, Goldman Sachs, Home Depot, IBM, Intel, Johnson & Johnson, JPMorgan Chase, McDonald’s, Merck, Microsoft, Nike, Pfizer, Procter & Gamble, Travelers, United Technologies, UnitedHealth, Verizon, Visa, Walmart, Walgreens Boots Alliance, and Walt Disney. But this can change.

Under-performers Drop off The Dow

With the recent market plunge, some DJIA companies not faring well will likely be replaced. In fact, there have been 53 changes as industries prospered or faltered. The longest continuing member of the Dow has been General Electric, which was removed and reinstated a couple of times before being dropped in 2018.

The DJIA continues to track the economically leading industries in the U.S. And while it’s still the most widely known and reported market benchmark, we also have two others – the Nasdaq Composite and the Standard & Poor’s 500.

So What Does “Dogs of The Dow” Mean?

If someone refers to “Dogs of The Dow,” they are talking about the DJIA companies that didn’t do well for the year, the underdogs. For whatever reason, these companies lost value and their stock prices fell. So they rank as the 10 lowest performing stocks in the Dow 30.

But since the dividends (the quarterly payments to the shareholders) for these “Dogs of The Dow” companies usually remain stable, these stocks are basically “on sale.” So an investor would pay less to own the stock and still get the same dividend (this is referred to as the dividend yield).

Since these companies are still looked upon as “blue chip” stocks, one famous (and really simple) investing strategy is to buy the “Dogs of The Dow” in early January and hold them for one year plus a day. The thinking is that these bell-weather companies have better potential to outperform or rebound more quickly.  So those who invest in the “Dogs of The Dow” have better-than-average odds of seeing stock prices rise plus the same dividend is collected.

Would you invest in the Dogs of The Dow? Would you prefer to buy those individual stocks or an ETF, Exchange Traded Fund of those?