THE Dow Jones Industrial Average is one of the best-known stock market indices. A beacon of proven stability, value and income, the index had a strong 2023, posting a cumulative return of 12.8%.
While there’s a lot to like about the Dow, I wouldn’t buy a Dow exchange-traded fund (ETF) directly, mainly because it contains five stocks that I’m not at all interested in owning: VerizonCommunications (NYSE:VZ), Walgreens Boot Alliance (NASDAQ:WBA), Merck (NYSE:MRK), Cisco Systems (NASDAQ:CSCO)And IBM (NYSE:IBM).
Here’s why I would avoid these five stocks and why the rest of the Dow this seems like a good place to invest for 2024.
The problem with Verizon is that it is highly leveraged and isn’t producing the earnings growth needed to support future dividend hikes. Walgreens has a better balance sheet, but its growth prospects are even worse than Verizon’s.
At their current stock prices, Verizon has a yield of 7.1% and Walgreens has a yield of 7.4%. These are the two best performing stocks on the Dow, but for good reason as their stocks have underperformed.
Investors looking for high-yielding stocks would be better off with some non-Dow stocks like United Parcel Service (NYSE:UPS)which has a yield of 4.2% but has much better prospects to increase its payments and income over time. Or Children Morgane (NYSE:KMI)a pipeline giant that has done an excellent job paying down its debt over the past few years and has a yield of 6.4%.
Poor healthcare choice
My decision to avoid Merck partly reflects the fact that the Dow is heavily exposed to the healthcare sector, and Merck stands out as the weakest of its healthcare holdings. Johnson & Johnson (NYSE:JNJ) is the ultimate heavy, dividend-paying giant. It has a good yield, a good valuation and is a dividend king with over 60 consecutive years of dividend increases.
UnitedHealth Group (NYSE:UNH) has become the largest stock in the price-weighted Dow Index and has generated excellent returns for investors – more than doubling over the past five years.
Amgen (NASDAQ:AMGN) is a biotechnology company with a history of dividend growth and a solid yield of over 3%. Its growth has been lagging lately, but its product portfolio offers it plenty of opportunities to turn things around.
J&J, UnitedHealth and Amgen are three solid stocks in the healthcare space. There’s no need to overdo it by adding what I consider to be a decent, but not great, healthcare stock at Merck.
Top or Bottom Tech Stocks
A similar line of thinking applies to IBM and Cisco. It’s not that I have anything against these companies in particular – it’s just that other tech stocks stand out as much better buys, and I really like Apple (NASDAQ:AAPL) And Microsoft (NASDAQ:MSFT).
Apple has what it takes to create generational wealth for investors, even those new to the business. The combination of its impeccable balance sheet, market position, ecosystem of products and services, and ability to generate tons of cash and repurchase shares gives it the financial muscle to generate shareholder value for coming years.
Meanwhile, Microsoft could become the most important stock in the Dow Jones. Like Apple, it has the balance sheet and cash flow to fuel growth. More than any other large company, it has a clear path to generating short-term returns through artificial intelligence. Microsoft’s balance of short- and long-term potential makes it an attractive stock to buy, even after its meteoric rise this year.
The other 25 stocks in the Dow
THE SPDR Dow Jones Industrial Average Trust (one of the largest Dow ETFs) has a price-to-earnings ratio of 22.1, which is slightly lower than the 23.9 ratio of SPDR S&P 500 Trust. However, the Dow stands out in that it has many large companies and, in general, higher quality names than the S&P 500. Many stocks in the Dow pay quality dividends, are not that expensive, and are leading companies in the sector.
When I think of fundamental starting positions in an industry, I usually think of the Dow Jones stocks that represent that industry. For example, if I could only buy two stocks in the financial sector, I would probably choose JPMorgan Chase And Visa — both Dow stocks. Chevronalso a component of the Dow, is my favorite energy specialty.
When I think about recession-proofing, I turn to McDonalds, Procter & Gamble, Coca-Cola, WalmartAnd Johnson & Johnson — all Dow stocks. When I think of great brands that will remain iconic for decades, I think of Apple, Walt DisneyAnd Nike — all Dow stocks.
When looking for an industry indicator that will benefit from growth in the overall economy, Dow stocks caterpillar, HoneywellAnd Home deposit almost always appears on my radar. The pattern is the same in almost all sectors.
In summary, I think Dow Jones companies are generally good representatives of their respective industries. The valuations of many of these companies are not that high relative to the market. For these reasons, the Dow is a great place to look for a mix of growth, revenue, and value in 2024.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has positions in Walt Disney and has the following options: long January 2026 $65 calls on Walt Disney, long June 2025 $105 calls on Walt Disney, and short June 2025 $110 calls on Walt Disney. The Motley Fool holds positions and recommends Apple, Cisco Systems, Home Depot, JPMorgan Chase, Kinder Morgan, Merck, Microsoft, Nike, Visa, Walmart and Walt Disney. The Motley Fool recommends Amgen, Chevron, International Business Machines, Johnson & Johnson, United Parcel Service, UnitedHealth Group and Verizon Communications and recommends the following options: long January 2024 $47.50 calls on Coca-Cola and long 47 calls $.50 in January 2025 on Nike. The Mad Motley has a disclosure policy.
There are only 5 Dow stocks I wouldn’t buy in 2024 was originally published by The Motley Fool