Dow Jones Industrial Average Changes – Making History!

On Friday morning, November 8, 2024, the Dow Jones Industrial Average (referred to here as the Dow Index) will replace two of its 30 components. Such changes in this index are rare, with the previous one taking place in February 2024, when Amazon.com replaced Walgreens Boots Alliance and before that on August 31, 2020, when Amgen, Honeywell and Salesforce.com replaced ExxonMobil, Pfizer and Raytheon.

NVIDIA (NVDA) will replace Intel (INTC), and Sherwin-Williams (SHW) will replace Dow Inc (DOW) – no connection to the Dow Index. In both cases, the replacements are in the same industry sector as the dropped companies. Usually, replacements are made to align better with the industries represented in the overall economy. This time, it is simply to upgrade the components to reflect more significant companies in the same industries.

DOW has a market cap of $34 billion. Its price change has been pretty flat over the past five years and it has a 5.7% yield. SHW’s market cap is $90 billion and has had a significant run-up over the past five years. Its dividend reflects a 0.8% yield.

NVDA, with a $3.3 trillion market cap, is among the top three most valuable companies. Its stock price jumped super-significantly over the last five years, particularly in the last year, and it has a minuscule dividend yield. INTC’s market cap is $100 billion and has significantly dropped over the last five years. It has a 2.2% yield.

Whether the replacement companies will continue their growth remains to be seen, but I believe both appear to be better representatives of their industries. Sometimes, a highflyer entering an index initially has stunted growth, waiting for its earnings to catch up to its current value, but who knows!

The two new components will affect a reduced dividend payout for this index.

The market cap of the S&P 500 companies is about $45 trillion while the Dow Index is about $15 billion. The top three companies in the S&P 500 index account for about 20% of its market cap with NVDA a third of that at 6.75%. Apple (AAPL) and Microsoft (MSFT) are the other two largest components.

The way the Dow Index is configured, the dominant components are based on the price of each company’s individual shares. Lower-priced shares have less impact than higher-priced shares. An example is Apple’s share price was around $500 in 2020 before its four-for-one split, making it one of the most dominant stocks in the Dow. After the split, Apple’s share price was around $125, and it dropped approximately halfway down the list of 30 stocks. The index adjusts itself for such splits by changes in its divisor. Currently, the divisor is .1517. This means that the net daily changes in the share prices of all 30 stocks are divided by .1517 to get the change in the Dow index. This divisor will change on Friday.

I explain most of this in my annual analyses of the markets in the blogs I post in January each year. I also include all this data in my annual stock market update presentations for the East Brunswick Public Library. My February 2024 100-page handout will be emailed to you if you send a request to [email protected] and just put Stock Market Update as the subject. No messages are necessary.

Note that the S&P 500 index has 500 components, with its top three very dominant and the top 10 accounting for a $16.8 trillion market cap or 37% of the index. The 30 stocks in the Dow index are valued at about $15 billion with its top 10 at a market cap of $11.6 trillion (pre NVDA). The huge market cap of the S&P 500 index makes it a more significant index than the Dow Index. Although I believe the Dow Index is more popularly recognized by the average investor.

I do not believe these changes will affect investors in the index funds too much because the Dow Index will still represent the more industrial companies. The S&P 500 index has more frequent changes as it is periodically adjusted as companies enter and leave the top 500 positions based on market cap.

For more information about the interplay between the indexes, here is a link to my recent blog post.

This blog is presented for informational purposes and is not intended to reflect investment advice. Consider what I write and discuss any potential strategy changes with your personal investment advisor.