The Dow Jones Industrial Average is one of the best-known stock market indexes. A beacon of proven stability, value, and income, the index has had a great 2023, posting a year-to-date return of 12.8%.
While there's a lot to like about the Dow, I wouldn't buy a Dow exchange-traded fund (ETF) outright, mainly because there are five stocks in it that I'm not at all interested in owning: Verizon Communications (VZ 0.91%), Walgreens Boots Alliance (WBA +0.00%), Merck (MRK 1.72%), Cisco Systems (CSCO 0.30%), and IBM (IBM +1.98%).
Here's why I'd avoid these five stocks, and why the rest of the Dow looks like a good place to invest for 2024.
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Financial weakness
The problem with Verizon is that it has a ton of debt and isn't producing the earnings growth to support future dividend hikes. Walgreens has a better balance sheet, but its growth prospects are even worse than Verizon's.
At their current share prices, Verizon has a yield of 7.1% and Walgreens yields 7.4%. They are the two highest-yielding stocks in the Dow, but for good reason since their shares have been underperforming.
Investors searching for high-yield stocks would be better off with some non-Dow stocks like United Parcel Service (UPS +0.26%), which has a 4.2% yield but has far better prospects for growing its payouts and earnings over time. Or Kinder Morgan (KMI +0.16%), a pipeline giant that has done an excellent job of paying down debt over the last few years and has a yield of 6.4%.
A so-so healthcare pick
My decision to avoid Merck is in part a reflection of the fact that the Dow has a lot of exposure to healthcare, and Merck stands out as the weakest of its healthcare stocks. Johnson & Johnson (JNJ 0.60%) is the quintessential stodgy, dividend-paying behemoth. It has a nice yield, a good valuation, and is a Dividend King with over 60 consecutive years of dividend raises.
UnitedHealth Group (UNH 0.04%) has become the most important stock in the price-weighted Dow index and has delivered excellent returns for investors -- more than doubling in the last five years.
Amgen (AMGN 0.78%) is a biotech company with a track record of dividend growth and a solid yield of more than 3%. Its growth has been lagging recently, but its product pipeline gives it plenty of opportunities to turn things around.
J&J, UnitedHealth, and Amgen are three solid healthcare stocks. There's no need to overdo it by adding what I consider to be a decent, but not great, healthcare stock in Merck.
Superior vs. Inferior tech stocks
A similar line of thinking applies to IBM and Cisco. It's not that I have anything against those particular companies -- it's just that other tech stocks stand out as far better buys, and I really like Apple (AAPL +2.94%) and Microsoft (MSFT +4.64%).
Apple has what it takes to create generational wealth for investors, even those who are new to the stock. The combination of its impeccable balance sheet, its market position, its product and service ecosystem, and its ability to generate tons of cash and buy back stock gives it the financial muscle needed to deliver shareholder value for years to come.
NASDAQ: AAPL
Key Data Points
Meanwhile, Microsoft could become the most important stock in the Dow. Like Apple, it has the balance sheet and cash flow to fuel growth. More than any other major company, it has a clear path toward generating near-term returns from artificial intelligence. Microsoft's balance of short-term and long-term potential makes it an attractive stock to buy, even after its blistering run-up this year.
The other 25 Dow stocks
The SPDR Dow Jones Industrial Average Trust (one of the largest Dow ETFs) has a price-to-earnings ratio of 22.1 -- which is slightly below the 23.9 ratio of the SPDR S&P 500 Trust. However, the Dow stands out as having a lot of great companies and, in general, higher-quality names than the S&P 500. Many Dow stocks pay quality dividends, aren't that expensive, and are industry-leading businesses.
When I think of foundational starting positions in a sector, I usually think of the Dow stocks that represent that sector. For example, if I could only buy two stocks in the financial sector, I would probably pick JPMorgan Chase and Visa -- both Dow stocks. Chevron, also a Dow component, is my favorite energy major.
When I think of recession resistance, I turn to McDonald's, Procter & Gamble, Coca-Cola, Walmart, and Johnson & Johnson -- all Dow stocks. When I think of top brands that will stay iconic for decades to come, I think of Apple, Walt Disney, and Nike -- all Dow stocks.
When searching for an industrial bellwether that will benefit from the growth of the overall economy, Dow stocks Caterpillar, Honeywell, and Home Depot almost always pop up on my radar. The pattern is the same for just about every industry.
In sum, I think the companies in the Dow are generally the right representatives for their respective industries. The valuations of many of these companies aren't that expensive relative to the market. For those reasons, the Dow is a great place to look for a blend of growth, income, and value in 2024.
