Over the long run, Wall Street has proven time and again that it's a superior wealth creator. Though gold, oil, housing, and Treasury bonds, have helped investors increase their nominal wealth over time, no asset class has generated a more robust annualized return over the past century than stocks.
For more than a century, the iconic Dow Jones industrial Average (^DJI 0.25%) has served as the most-watched barometer of Wall Street's "health." This index, which contained 12 predominantly industrial stocks when it debuted in May 1896, is now home to 30 time-tested, multinational businesses.
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Last month, the ageless Dow Jones did something it's accomplished numerous times throughout its storied history: it hit a new all-time high. It came within a stone's throw (about 111 points) of reaching the 40,000-point plateau. That's one heck of a journey from the 41.22 points it closed at during the height of the Great Depression in 1932.
The $64,000 question is: Can the Dow Jones Industrial Average reach 50,000? If history has anything to say about it, the Dow hitting 50,000 can occur sooner than you might think.
Based on history, Dow 50,000 may be right around the corner
Let me preface this discussion by plainly noting that short-term directional movements in the stock market can't be predicted with any sustained accuracy. While there are a couple of money-based metrics and predictive indicators that have strongly correlated with short-term moves in the Dow and other major stock indexes throughout history, directional moves are largely uncertain over the span of days, weeks, and months.
But if there's one virtual guarantee on Wall Street, it's that the major stock indexes, including the Dow Jones, rise over extended periods. Over multidecade stretches, the Dow has been nothing short of a bona fide moneymaker.
For example, the St. Louis Federal Reserve lists the value of the Dow Jones as 91.95 in April 1924. As of the closing bell on April 12, 2024, the Dow stood at 37,893.24. Despite the Great Depression, stagflation in the 1970s, runaway inflation in the early 1980s, the dot-com bubble, and the financial crisis, this iconic index has averaged an annualized return of 6.21% over the past century. At this rate of return, the Dow would eclipse the psychologically important 50,000 level by early 2029.
But what you might not realize is that the Dow Jones Industrial Average has been delivering outsized historic returns since the advent of the internet three decades ago. Although the Dow is predominantly comprised of mature businesses that are well past their growth heydays, the internet opened new pathways that allowed even stalwart companies to shine.
On April 12, 1994, the Dow Jones Industrial Average closed at 3,681.69. Over the trailing-30-year period, this widely followed index has increased at an annualized rate of 8.09%! If this superior rate of gains were to persist, the Dow could reach 50,000 before the calendar changes to 2028.
Image source: Getty Images.
Here's why Dow 50,000 is practically inevitable
Although Wall Street's major stock indexes rarely adhere to average annual returns, history strongly suggests the Dow reaching 50,000 is inevitable and only a matter of time.
1. Dow components have well-defined competitive advantages
The primary reason the Dow continues to increase in value over time is because it's comprised of profitable, industry-leading businesses. Even though most of these companies aren't growing as quickly as they once were, they offer undeniable competitive advantages.
To offer just one example, retail behemoth Walmart (WMT 0.04%) is able to use its size to its advantage. Walmart's deep pockets allow it to purchase products in bulk, thereby lowering its per-unit costs. It also carries a broader selection of products than traditional grocery stores and local shops. This gives it a clear edge over most brick-and-mortar retailers, and has allowed Walmart's stock to gain nearly 964,000%, including dividends paid, over the trailing-50-year period.
2. Most Dow stocks are dividend payers
Another reason the Dow is no stranger to reaching new heights is because many of its components pay a regular dividend. With the exception of Amazon (AMZN 0.32%), which has never paid a dividend, and Boeing, which halted its quarterly payout during the COVID-19 pandemic, the other 28 Dow components all pay a regular dividend.
Companies that share a percentage of their earnings with investors are almost always profitable on a recurring basis and can usually provide transparent long-term growth outlooks.
Something else to note is that dividend stocks have absolutely crushed non-paying companies over the last half-century. A recently updated report from Hartford Funds, in collaboration with Ned Davis Research, found that dividend payers delivered an average annual return of 9.17% between 1973 and 2023, and did so while being 6% less volatile than the benchmark S&P 500. By comparison, non-payers averaged a subdued 4.27% annual return over the same timeline, and they were 18% more volatile than the S&P 500.
Coca-Cola (KO 0.26%) is a shining example of a Dow dividend stock that keeps delivering for its patient investors. Coca-Cola has ongoing operations in all but three countries, and it sports a product portfolio that has more than dozen brands generating at least $1 billion in annual sales. The predictability of Coca-Cola's cash flow has given management the confidence to raise its base annual payout for 62 consecutive years.
3. Underperforming companies are given the boot
Lastly, the committee that oversees additions and subtractions to the Dow, known as S&P Dow Jones Indices, ensures the iconic index is packed with top-tier, outperforming businesses.
For instance, pharmacy chain Walgreens Boots Alliance (WBA 1.19%) was shown the door before the start of trading on February 26. Based on the Dow divisor at the time -- the Dow divisor is what equates one dollar in share price to Dow Jones Industrial Average points -- Walgreens Boots Alliance only accounted for roughly 143 Dow points.
Growing online pharmacy competition from the likes of Amazon has weighed on its bottom line. Despite Walgreens having a clear turnaround plan in place, it isn't the type of stock that would help push the Dow Jones to new heights.
Perhaps it's fitting that Amazon is the company that replaced Walgreens in the Dow. Though Amazon's mammoth stock gains are likely in the rearview mirror, its rapidly growing cloud infrastructure service platform, Amazon Web Services (AWS), should fuel substantial growth in the company's operating cash flow throughout the decade.
Don't expect the Dow to rise in a straight line -- but don't be surprised if Dow 50,000 occurs well before the turn of the decade.
