Dow Industrials Outgain S&P 500

1/23/2012


The S&P 500 Index gets all the love. Many newsletters (including the Forecasts) and money managers use it as a benchmark against which to measure their returns. But the biggest headline doesn't always equate to the best story.

You probably heard that the Dow Jones Industrial Average returned 8.4% last year, topping the S&P 500's 2.1%. But most of the news shows didn't mention that the Industrials have also delivered higher returns over the last three years, and over the last decade. The Industrials outperformed the S&P 500 in five of the last 10 years, a record that suggests the oft-overlooked average is far from irrelevant.

We've all heard the criticisms: The Dow Jones Industrial Average contains only 30 stocks, so how can it accurately reflect a broad market? The average is stodgy because it focuses on Old Economy stocks. The market-value weightings used by indexes like the S&P 500 make more sense than the antiquated  price weighting of the Dow Jones Industrial Average.

All of those criticisms are true, and at least partially valid. But as legendary football coach Vince Lombardi asked, "If winning isn't everything, why do they keep score?" Those who  keep score can attest that the Dow Industrials are doing something right.

Yes, the average only contains 30 stocks. But most of those stocks are large and strong, and all are key movers in their industries. The Industrials overweight consumer staples and industrials relative to the S&P 500, with large underweights in financials, health care, and utilities.

Check out the table below. On average, Dow stocks are larger, pay richer dividend yields, and earn higher Quadrix® Value, Quality, and Overall scores than S&P 500 stocks.

If the Dow is stodgy, then I'm all for investing the old-fashioned way, in blue-chip stocks. Buying attractively valued industry leaders is a strategy that works, and we currently recommend eight of the stocks in the Industrials — Chevron ($107; CVX), Exxon Mobil ($86; XOM), Hewlett-Packard ($26; HPQ), IBM ($180; IBM), Intel ($25; INTC), J.P. Morgan Chase ($35; JPM), Microsoft ($28; MSFT), and Wal-Mart Stores ($60; WMT).

DOW VERSUS S&P 500
Dow Jones
Industrials
S&P 500
Index
No. Of Stocks
30
500
Avg. Yield (%)
2.6
1.9
Avg. Market Cap (Bil.) ($)
124.8
24.3
Sector Weights (%)
Cons. Discretionary
11
11
Consumer Staples
14
11
Energy 
12
12
Financials 
9
14
Health Care 
8
12
Industrials 
22
11
Materials 
4
4
Technology 
17
19
Telecom Services 
4
3
Utilities 
0
4
Average Quadrix Scores
Momentum
51
54
Value
64
58
Quality
65
63
Fin. Str.
63
58
Earnings Ests.
42
43
Performance
66
58
Overall
66
62
Note: Quadrix Scores are percentile ranks, with 100 the best. Sector weightings are based on price-weighting for the Dow Industrials and market-value weighting for the S&P 500.

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