Index Center

Dow Jones Industrial Average Index (DJIA)

Index Center

What Is It?

At 100+ years, the DJIA is the oldest continuing U.S. market index. It is comprised of 30 blue chip stocks whose one binding similarity is their hugeness. The DJIA is the best-known market indicator in the world, partly because it is old enough that many generations of investors have become accustomed to quoting it, and partly because the U.S. stock market is the world's most valuable.

Fun Fact

Only one of the original 12 DJIA stocks is in the index today. (Hint: David Letterman used to have a ball poking fun at it when his show was carried on NBC, one of this company's divisions.) That's right, Letterman was jiving General Electric.

Financial Statistics as of 8/29/01
Total Market Capitalization $3.34 trillion
Average P/E 24.76
Dividend Yield 1.81%

Type of Companies

Large-cap companies representative of U.S. industry. The Dow includes powerhouses such as Proctor and Gamble, Home Depot, Coca Cola, and Microsoft. Although it consists entirely of very large companies, it's designed to represent almost any U.S. company that isn't in the transportation business or a utility. Only substantial industrial companies with a history of successful growth and wide interest among investors are considered for inclusion.

Number of Companies

30

Top 10 Weighted Companies as of 8/29/01*
3M (MMM) 7.2%
IBM (IBM) 6.9%
Proctor & Gamble (PG) 5.2%
United Technologies (UTX) 4.7%
Merck (MRK) 4.6%
Microsoft (MSFT) 4.0%
General Motors (GM) 3.7%
Johnson & Johnson (JNJ) 3.7%
Boeing & Co. (BA) 3.5%
Caterpillar (CAT) 3.5%
*The Dow is price-weighted so unlike the other indexes, the most influential companies are those with the highest share price.

How It Is Measured

The "average" is in the title because the index's performance was originally computed by adding up stock prices and dividing by the number of stocks. The methodology remains the same today, but the divisor has been changed to preserve historical continuity. The DJIA is a price-weighted index calculated daily based on the price of each company without any regard to the relative size of each component.

Strengths

The focus on mega-cap companies provides significant stability for the DJIA. Each company is recognizable to significant portions of the investing public. As the oldest, most frequently referenced index, when people ask how "the market" has done, they are usually asking about the DJIA.

Industry Composition as of 8/29/01
  # of
cos.
% of index
Consumer Discretionary 6 20.0%
Consumer Staples 3 10.0%
Energy 1 3.3%
Healthcare 2 6.7%
Industrials 6 20.0%
Information Tech 4 13.3%
Materials 3 10.0%
Telecomm. Services 2 6.7%

Weaknesses

Because it is restricted to U.S.-based companies -- and just 30 companies at that -- the DJIA is not very diverse. Because, by definition, it focuses largely on industrial companies, in the information age it may not accurately reflect the performance of large swaths of the U.S. or global marketplace. Because it is price-weighted, it does not track the performance of the companies in a way that reflects a rational investor's gains. To equal the Dow's performance, an investor would have to buy the same number of shares of each company; such a strategy would force the investor to invest more money in companies with higher share prices, not a terribly rational way to invest.

Investing in the DJIA

The DJIA has several financial products related to it, including index funds and exchange-traded funds such as Dow Diamonds (Amex: DIA). The companies of the DJIA are not likely to disappear -- they are some of the largest in the U.S. An investor looking for low risk, capital preservation, and some income from dividends would be the ideal purchaser of products linked to the Dow.

Related Links