These 3 Stocks Gave the Dow Jones its Biggest Gains in 2014

The appeal of stock indices is their ability to serve as guides to the market's daily gyrations. Many track hundreds or even thousands of stocks, but the most famous index of all -- the Dow Jones Industrial Average (DJINDICES: ^DJI  ) -- keeps it simple, with a slim list of 30 companies representing the best of American industry. That makes the Dow easier to follow, but it can also make it easier for a single stock to push the blue-chip index around, especially if that stock has one of the higher share prices of the Dow's components.

With the first six months of 2014 in the rearview mirror, we can see just which stocks helped the Dow most. This is a little more complex than simply pointing out which stocks enjoyed the most growth, since the Dow's price-weighting structure will result in larger moves when a stock trading at triple-digit prices goes wild. To illustrate how this works, let's first look at the Dow's three best-performing stocks for the first half of 2014:

^DJI Chart

^DJI data by YCharts.

The three stocks that actually produced the best gains for the Dow look a little different:

^DJI Chart

^DJI data by YCharts.

It's easy to see why the latter chart has meant more to the Dow than the former when you look at the share prices for all five stocks:

CAT Chart

CAT data by YCharts.

Now that we know which stocks gave the Dow its biggest lift this year, let's dig a little deeper to understand why they've been 2014's best performers.

Third-biggest impact: Disney (added 0.4% to the Dow in the first half)
Disney (NYSE: DIS  ) has been on a roll this year, but you could probably say the same thing about the House of Mouse for most of the past decade. Disney's dominance of the cable TV landscape is undisputed, though many investors (at least those who don't already own Disney shares) might be surprised to realize just how important cable is to Disney's bottom line. Disney's film segment is no slouch, either, delivering two of 2014's five highest-grossing films to date worldwide: the $700-million Captain America: The Winter Soldier and Sleeping Beauty live-action spinoff Maleficent, which has pulled in nearly $600 million worldwide.

Disney's stock gains are certainly boosted by the fact that it has doubled its trailing 12-month profit margin (from roughly 7.5% to nearly 15%), and more than doubled its free cash flow per share, in the past decade. Disney is rarely among the five best-performing Dow  stocks in any given year, but its just-above-average weighting (it's currently 14th of the Dow's 30 components by share price) has moved the index more than all but two other components in 2014.

Second-biggest impact: Johnson & Johnson (added 0.6% to the Dow in the first half)
Investors in Johnson & Johnson (NYSE: JNJ  ) tend to not expect dramatic moves, and over the past few years its stock has been the very definition of dullness, as the stock moved more or less in lockstep with the Dow until breaking out about a year ago. Since then, J&J has nearly doubled the Dow's gain, and deservedly so, as its trailing 12-month EPS has grown by 43% over the past four quarters, which has pushed the stock's P/E ratio lower even as many Dow components are seeing shares surge past any improvement in their fundamentals.

J&J is too big to depend on any one product to keep its business healthy, but it has done an excellent job at improving the profitability of its two core segments -- its latest quarter showed double-digit year-over-year pretax profit growth for pharmaceuticals (up 33%) and medical devices and diagnostics (up 30%), which more than made up for a 12% year-over-year decline in the consumer segment, which is far smaller in top- or bottom-line terms. J&J is the smallest of nine Dow stocks with a solid triple-digit share price (two others recently broke the triple-digit barrier), but this standing is good for a 4% weight on the index. Without J&J, the Dow wouldn't have broken past a 1% gain for the first half.

Caterpillar has been bulldozing critics in 2014.
Source: Wikimedia Commons.

Biggest impact on the Dow: Caterpillar (added 0.9% in the first half)
Caterpillar
(NYSE: CAT  ) has been the strangest stock on the Dow for the first half of the year, with many analysts (including the Fool's own Dan Caplinger) concluding that its index-leading gains are little more than a rebound from hitting bottom last year. Fool industrials specialist Daniel Miller has done an excellent job of highlighting the grinding slowdown in sales across Caterpillar's three core segments, and has also pointed out just how deep its recent cost-cutting efforts have gone as the company struggles to keep its bottom line strong.

A year ago, Caterpillar's P/E of 11 was among the lowest of the Dow's 30 components. After a year of weak earnings and strong share-price growth, that's no longer true, but investors don't seem to mind, as Caterpillar continues to buy back shares and boost its dividend year after year. According to my calculations, Caterpillar is one of only 12 Dow components that has used less than its total free cash flow on dividends and buybacks, which means it still has room to increase shareholder returns. While this probably won't be enough to sustain Caterpillar's share-price surge in the second half, that spike has tacked on nearly a full percentage point of growth to a sluggish index in 2014.

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