There isn't a more iconic stock market index in the world than the Dow Jones Industrial Average (DJINDICES: ^DJI). Since the Dow's inception more than 123 years ago, Wall Street has keenly eyed its performance, which, as of today, holds 30 multinational companies from a variety of industries.
Although the Dow does have clear flaws, it's still an index that investors trust, as well as invest in via tracking exchange-traded funds such as the SPDR Dow Jones Industrial Average ETF.
While most investors are focused on the Dow's short-term performance and when it'll clear its next milestone, such as hitting 28,000 (its current all-time intraday high is just shy of 27,400), I believe they're missing the bigger picture: Dow 100,000.
Dow 100,000 might seem like a pipe dream, especially considering that the Dow was below 6,600 just 10.5 years ago. But I assure you that it's not a pie-in the-sky figure. In fact, I'd opine that Dow 100,000 will happen by 2035, if not sooner. Here are four reasons Dow 100,000 in 15 years could become a reality.
1. The data says so
To begin with, I'm a big fan of data -- and the data doesn't lie. Even though averages are just that -- averages -- the Dow Jones Industrial Average has returned an impressive 9.27% on a compound annual basis over the trailing 35-year period (Sept. 24, 1984 to Sept. 23, 2019). When extrapolated outward, this works out to a doubling in value every 7.77 years. With the Dow closing at north of 26,900 on Monday, Sept. 23, it would take only about 15 years (roughly until the calendar turn from 2034 into 2035) at an annualized return rate of 9.27% for the Dow to hit the psychologically important 100,000 mark.
2. It's a price-weighted index, and the highest-priced companies are outperforming
Another factor to consider is that the Dow Jones Industrial Average is a price-weighted index. This means that a stock's share price, not its market cap, matters in how the Dow's value is calculated. As of this past April, the Dow's divisor stood at 0.14744568353097. This large jumble of numbers simply means that for every $1 change in the share price of a Dow component, it equates to a 6.782-point move in the Dow (1 divided by 0.14744568353097).
Right now the Dow has six components with a share price north of $200: Boeing, Home Depot, UnitedHealth Group, Apple, McDonald's, and Goldman Sachs. Combined, these six companies account for 9,942 Dow points, or nearly 37% of the Index. Most of these high-share-price stocks have absolutely run circles around their peers over the past decade in terms of total return, and may continue to do so.
3. Poor-performing companies are cycled out
On the other side of the coin, the committee that handles component changes to the Dow Jones Industrial Average moves pretty quickly when it comes to removing underperforming companies.
Since its inception, the Dow Jones has seen its components change a bit over 50 times. This is often done when a component no longer becomes as relevant to the U.S. economy, or its share price fails to have much of an impact on the price-weighted Index.
For example, despite General Electric's (NYSE: GE) pretty hefty market cap, its amazingly long run in the Dow came to an end in June 2018. On the day it was removed from the Dow, General Electric had a closing share price of $13.02. This meant General Electric, a serial underperformer since the end of the Great Recession as a result of residual financial and oil and gas division weakness, only accounted for about 88 Dow points. The Dow Committee's willingness to swap out poor performers like General Electric demonstrates its desire to pack the Index with today's top-performing multinational companies.
4. Great companies tend to rise in value over time
Finally, it's important to realize that the Dow is mostly comprised of well-known, brand-name companies -- and long-term investors love to buy companies they're familiar with.
Take Johnson & Johnson (NYSE: JNJ) as an example. Johnson & Johnson is one of only two publicly traded companies in the U.S. with a AAA credit rating (the other is Microsoft, another Dow component), and it's working on a 35-year streak of adjusted operating earnings growth. It also has an impressive 57-year streak of increasing its quarterly dividend. Johnson & Johnson's three operating segments -- pharmaceuticals, consumer health products, and medical devices -- each bring something to the table that the other segments lack, thereby providing a healthy combination of margin expansion, long-tail growth, and predictable cash flow.
The Dow is absolutely filled with companies like J&J that are designed to survive virtually anything thrown at them by the economy.
While 100,000 might sound like a wide-eyed number for the iconic Dow, it's a very real possibility by 2035.
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Microsoft. The Motley Fool has the following options: short February 2020 $205 calls on Home Depot, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, long January 2021 $85 calls on Microsoft, and long January 2021 $120 calls on Home Depot. The Motley Fool recommends Home Depot, Johnson & Johnson, and UnitedHealth Group. The Motley Fool has a disclosure policy.
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