Beginner Investing : What Is the Dow Jones Industrial Average?

Explanation

The Dow Jones Industrial Average is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. It is now owned by the CME Group, which is the majority owner of Dow Jones Indexes. The average is named after Dow and one of his business associates, statistician Edward Jones. It is an index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market.

Investing in the DJIA

The Dow Jones Industrial Average isn't just a stock market gauge. For some people, it's a tool in an investment strategy. Probably the most popular strategy - and one of the more successful over time - is to invest each year in the 10 Dow Jones industrial stocks with the highest dividend yields (the yield is a stock's dividend divided by the share price). From 1973 to 1994, this strategy produced an annual total return of 17.5%, compared with 11.5% derived from investing in all 30 of The Dow industrial stocks, according to the book The Dividend Investor by Harvey C. Knowles III and Damon H. Petty.

 In the century-plus history of The Dow Jones Industrial Average, dividends have directly accounted for about 40% of investors' returns. If the dividends are reinvested in the 30 stocks,  roughly half of investors' total returns are derived from dividends.

In the broader market, simply buying the highest-yielding stocks is usually considered unwise. A high yield often indicates a depressed stock price, which might mean that the company has stumbled. The dividend may be cut or eliminated, or the company may be headed for even more serious trouble.