How the Dow's Latest Picks Have Fared

The Dow Jones Industrial Average (INDEX: ^DJI), as the name indicates, started out by tracking the leading U.S. industrial companies of the late 19th century. It has widened its scope beyond traditional heavy industries, but still tracks the movement of 30 large companies during daily trading sessions. A scaled average of these companies is reported throughout the trading day and, like the S&P 500, is used to track the general health of the stock market, if not the entire U.S. economy.

In a recent article, I wrote about the oldest stocks on the Dow Jones. As a contrast, we will today examine the most recent additions to the list. Most, if not all, are known to investors and have some mixed results since being placed on the average. Of these seven, four are among the Dow's top 10 dividend stocks, and all could be a great foundation to any investment portfolio.

Source: DJIndexes.com, FinViz.com, and Yahoo! Finance.
*Reflects date of most recent addition.

Out with the old
Pfizer and Verizon Communications were added to the index on the same day, replacing former industrial stalwarts Eastman Kodak and International Paper. Stock selection for the index is not governed by specific rules, but the addition of both these companies shows the Dow's ability to select companies that are bellwethers of their industries.

Pfizer has been a leading pharmaceutical company since the introduction of Lipitor and Viagra, among many other drugs in its illustrious history, and is one of three pharmaceuticals currently on the index. In addition, its quarterly dividend has been paid uninterrupted since 1901, though recently at a lower level. Verizon, because the Department of Justice has stepped in to block the proposed merger of AT&T and T-Mobile, continues to be the No. 1 U.S. cell-phone provider by subscriber count. It is also the second-highest yielding stock of the current 30 companies on the Dow. Our very own CAPS Community is very bullish on the company as well.

One good, one bad
The next two additions to the Dow could not be more different. Chevron was included in the Dow as Standard Oil of California from July 1930 to August 1982 and continued on as Chevron until November 1999. The company was plucked from the list at the height of the late '90s technology bubble, replaced by Microsoft and Intel. It was re-added in 2008 because of the growing importance of oil and gas in the world economy. It has held the third place on the Fortune 500 list for the past four years, and it's a top 10 producer of natural gas. If it raises its dividend payout again next year, it will become a "dividend aristocrat."

Contrast that with the other addition from February 2008. In my opinion, Bank of America could be the next stock to be replaced on the Dow, considering its recent slide and dismal returns since its addition to the average. Selection by Dow Jones indicates that a stock is added only if the company has "an excellent reputation." Although recent results indicate that the bank may be turning the corner, a recent decision to implement a $5-a-month fee for using a debit card has been met with harsh criticism. Bank of America could soon follow former Dow stock Citigroup off the index if its reputation and performance don't improve.

Adding food to the mix
In the midst of American International Group's bailout in 2008, the insurer was removed from the index, replaced by Kraft simply because there was no food maker on the list. Although the pending split-up of Kraft into two businesses should not affect its position in the Dow, the price-weighted aspect of the index could change as a result of the split. In the meantime, the stock's yield and 12 iconic billion-dollar brands should allow the company to maintain its place on the index and as an industry leader.

The babies of the bunch
After General Motors declared bankruptcy, it was removed from the Dow and replaced by Cisco. The world's largest maker of computer-networking equipment, Cisco joined tech titans Microsoft, Intel, IBM, and Hewlett-Packard in shifting the Dow away from true industrials. Its performance leaves a bit to be desired, and it only started paying a dividend in March. Nevertheless, there was a reason it was added to the index -- an indication that networking is as important to the economy now as cars were for most of the past century.

Ironically, Travelers replaced its former corporate parent on the index after Citigroup received $45 billion in taxpayer aid. Citigroup was formed when Travelers Group and Citicorp merged in 1998, but it subsequently spun off Travelers in 2002. Travelers performed the best since its inclusion on the list, though weather events this year have put a damper on earnings.

A great place to start
The Dow Jones Industrial Average simply tracks industry leaders among U.S. companies. A company's placement on the list does not guarantee a great stock, but it can be a great place to start researching companies. Although these stocks have been on the Dow for less than a decade, they are industry leaders and worth investigating further. You can start with our brand new special report that will help "Secure Your Future With 11 Rock-Solid Dividend Stocks."