Eleven reasons to AVOID investing in Dow Jones Industrial Average stocks

Of the 30 stocks in the Dow Jones Industrial Average, 11 of them would actually be worth less or just about the same as they were 10 years ago (including dividends!).

When I first started writing this blog post, I was going to call it “How to Invest Safely in Stocks.” My second recommendation was that beginners should start with a handful of the 30 stocks that make up the Dow Jones Industrial Average. Once I started digging through the numbers, though, I was a startled at what I found. Apparently, the blue-chip stocks aren’t the no-brainers most investors like to think they are.

Need proof? Check out this chart I put together of the 10-year returns for each of the 30 Dow Jones stocks:

Company 10-Year Stock Return 10-Year Dividend Return on $1,000 investment $1,000 is now worth
3M Company +46.6% $590.94 $3,458 (aided by a stock split)
Alcoa Inc. -68.1% $134.46 $449.82
American Express Company +41.47% $122.40 $1,514
AT&T Inc. -31.8% $357.12 $1,024
Bank of America Corp. -51.8% $718.58 $1,109
The Boeing Company +12.54% $218.16 $1,311
Caterpillar Inc. +208.7% $787.17 $7,093 (aided by a stock split)
Chevron Corporation +113.9% $794.85 $4,791
Cisco Systems, Inc. -7% $7.20 $933
The Coca-Cola Company +45.2% $284.76 $1,734
du Pont +11.1% $372.72 $1,462
Exxon Mobil Corporation +82% $319.44 $2,086
General Electric Company -61.9% $200.4 $572
Hewlett-Packard Company +2% $123 $1,129
The Home Depot, Inc. -32.7% $117.58 $780
Intel Corporation -29.7% $136.54 $825
International Business Machines Corp. +57.1% $127.26 $1,605
Johnson & Johnson +20.8% $257.22 $1,426
JPMorgan Chase & Co. -16.1% $273.12 $1,107
Kraft Foods Inc. +8.7% $283.34 $1,339
McDonald’s Corporation +198.4% $387.25 $3,351
Merck & Co., Inc. -51.2% $218.70 $698
Microsoft Corporation -20.1% $416.64 $1,998
Pfizer Inc. -56.3% $196.56 $634
The Procter & Gamble Company +68.6% $607.79 $3,884 (aided by a stock split)
The Travelers Companies, Inc. +11.8% $120.34 $1,206
United Technologies Corporation +94.9% $529.54 $4,305
Verizon Communications Inc. -31.5% $305.33 $988
Wal-Mart Stores, Inc. +4.7% $130.29 $1,141
The Walt Disney Company +25.1% $110.20 $1,330

What’s startling is this: of the 30 stocks in the Dow Jones Industrial Average, 11 of them would actually be worth less or just about the same as they were 10 years ago (including dividends!). That’s remarkable considering I didn’t factor in inflation, which have averaged 2.4 percent over the past decade (per FinTrend.com).

That means your odds of throwing a dart at a list of the Dow stocks and hitting a winner are only around 63 percent. That’s not much better than going to the casino and counting a few cards at the blackjack table.

Before you toss your hands up and cash in your IRA for guns and ammo, though, I’d be remiss if I didn’t point out that the average return on $1,000 for the 30 Dow component stocks was $1,842 over the past 10 years. Indeed, a $1,000 investment in Caterpillar Inc. (NYSE:CAT) would be worth $7,093 today. That’s not bad, but seeing the returns from a company like GE, which has crumpled more than 60 percent over the past 10 years is scary. And this year hasn’t been kind to the Dow, either. Take a peek at the YTD returns on each of the component stocks:

Company Ticker YTD Return Dividend Yield
3M Company NYSE:MMM -10.8% 2.86%
Alcoa Inc. NYSE:AA -27% 1.07%
American Express Company NYSE:AXP +3.9% 1.61%
AT&T Inc. NYSE:T -3.17% 6.05%
Bank of America Corp. NYSE:BAC -51.8% 0.62%
The Boeing Company NYSE:BA -10.5% 2.88%
Caterpillar Inc. NYSE:CAT -14.7% 2.3%
Chevron Corporation NYSE:CVX +2.25% 3.34%
Cisco Systems, Inc. NYSE:CSCO -25.8% 1.6%
The Coca-Cola Company NYSE:KO +2.28% 2.79%
du Pont NYSE:DD -12.1% 3.74%
Exxon Mobil Corporation NYSE:XOM -4.02% 2.68%
General Electric Company NYSE:GE -17.3% 3.97%
Hewlett-Packard Company NYSE:HPQ -41.9% 1.96%
The Home Depot, Inc. NYSE:HD -7.9% 3.1%
Intel Corporation NYSE:INTC -7.85% 4.33%
International Business Machines Corp. NYSE:IBM +8.33% 1.89%
Johnson & Johnson NYSE:JNJ -1.51% 3.6%
JPMorgan Chase & Co. NYSE:JPM -21.2% 2.99%
Kraft Foods Inc. NYSE:KFT +6.47% 3.46%
McDonald’s Corporation NYSE:MCD +14.3% 2.78%
Merck & Co., Inc. NYSE:MRK -13.1% 4.85%
Microsoft Corporation NYSE:MSFT -14% 2.67%
Pfizer Inc. NYSE:PFE +0.9% 4.52%
The Procter & Gamble Company NYSE:PG -4.07% 3.40%
The Travelers Companies, Inc. NYSE:TRV -11.8% 3.34%
United Technologies Corporation NYSE:UTX -14.02% 2.84%
Verizon Communications Inc. NYSE:VZ -2.6% 5.6%
Wal-Mart Stores, Inc. NYSE:WMT -3.23% 2.80%
The Walt Disney Company NYSE:DIS -14.6% 1.25%

Just seven out of the 30 Dow component stocks have actually appreciated in value this year. That should give you pause before you invest in a high-profile company solely on the strength of its name and brand.

The Takeaway

Here are three key things I take away from the charts above:

1) Energy is the name of the game. One sector in the Dow has strongly out-performed others in recent years. Namely, oil (ala Chevron and Exxon). And I wouldn’t expect that to change – particularly as fears over inflation mount.

2) Banking stocks have a lot of ground to make up. The fact that JPMorgan Chase is down 16.1 percent over the past 10 years, and Bank of America’s down a whopping 51.8 percent could get you thinking banking stocks have to turn the corner soon. I’d argue there’s a lot of pain for them on the horizon, particularly with the imminent threat of inflation. Banks thrive and dive on interest rates, and all those fixed mortgages BAC’s underwriting at 3 percent could come back to bite them in a high-inflation environment. That’s a big part of why banking stocks have fallen in recent months, and it’s a trend I expect to continue.

3) Follow the macro-trends. If you would have invested $1,000 in gold at the start of 2001, you’d now be holding onto $6,797 in bullion. Energy and inflation are the stories du jour, and your portfolio should reflect that reality. No one can say the next 10 years will play out the same as the past 10, but we can say the demand for oil isn’t going away anytime soon, and neither is our government’s debt problem. You can’t afford to ignore the macro picture anymore, unless, of course, you’re happy rolling the dice in your IRA.

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Top five stock picks for 2011

One of the keys to successful investing is beating the herd to the next hot stock. These five stocks and sectors could be those diamonds in the rough in 2011.

One of the keys to successful investing is beating the herd to the next hot stock. Here are my top five stock picks for 2011. They might not be in the limelight yet, but they very well could be by the end of the year:

1) Tech IPOs. In my unofficial tech IPO calendar for 2011, I detail 23 major tech companies that could have large, high-profile IPOs this year. Only one of those companies (Demand Media, Inc., NYSE:DMD) has gone public so far, and it shot up 33 percent in its first day of trading. The best are yet to come, from coupon-of-the-day company Groupon, which turned down a $6 billion offer from Google, to LinkedIn, a social networking company for professionals with more than 90 million members. Keep an eye on tech IPOs throughout the year as the market seems ready to take on more risk in a sector that’s growing rapidly; particularly in China.

2) Cloud-computing. As more businesses move their web sites and applications from dedicated web servers onto distributed server platforms, several companies are poised to soak up that new revenue stream. Amazon.com, Inc. (Public, NASDAQ:AMZN) has been at the forefront of the cloud computing industry although the company’s not all that transparent on how much revenue cloud computing actually generates for them. Estimates range from $500 million in 2010 to $1 billion. UBS analysts Brian Pitz and Brian Fitzgerald predict cloud computing could pull in some $2.5 billion a year for Amazon by 2014. Two other players you might consider in the space: Cisco Systems, Inc. (Public, NASDAQ:CSCO) and dedicated web hosting company Rackspace Hosting, Inc. (NYSE:RAX). Shares in Rackspace are up more than 86 percent over the past six months.

3) Blue chip stocks. Thanks to exchange rates and a falling dollar, even investors abroad are moving into large-cap American stocks. “Australian investors have a once-in-a-generation opportunity to get as much money as they can into overseas assets, ideally blue-chip global industrial companies,” Mike Hawkins, head of private clients at Evans and Partners, tells The Australian. “When you’re talking about those high-quality global blue-chip names, the likes of Nestle and Procter and Gamble (NYSE:PG) and Kraft (NYSE:KFT) and Unilever (NYSE:UL), you’re talking about companies that are well tapped into the growth in income and demand coming from emerging markets. We see this as a bigger story than China and India’s demand for Australia’s raw materials: the growth of the emerging-market consumer is a far more powerful and enduring theme than simply the supply of raw materials to China.” As a middle class begins to develop in emerging markets, consumers will have more disposable income for food and hygiene products. American blue chips have been positioning themselves in those markets for decades, and it could finally start paying off as the falling dollar will make their goods more affordable on Chinese shelves.

4) Platinum and palladium stocks. In the precious metals community, the focus throughout 2010 was almost exclusively on gold and silver. Gold posted gains for the year of 30 percent and silver rose 80 percent. Platinum and palladium did just as well with palladium shooting up 100 percent in 2010 and platinum rising 20 percent. The gains in platinum and palladium largely came on the heels of increasing demand from China and India where the metals are used as autocatalysts to limit pollution from cars and other vehicles. Car sales surged 32 percent in China and 31 percent in India last year. GM’s President of International Operations Tim Lee expects that growth rate to slow to 10 to 15 percent in 2011 as commodity prices rise. Still, Lee points out that the sheer size of the market in China still equates to a lot of demand. “Even 10 to 15 percent growth on such a huge base makes China a vast market,” he tells AFP. For all the talk of hybrid and electric vehicles, they still only account for 3 percent of the auto market worldwide, meaning they’ll hardly dent the growing appetite for platinum and palladium. Stricter emission standards in the U.S. should also compensate for the decreased demand for platinum and palladium as more of the metals will be used to limit emissions. ETFs offer the easiest (and safest) way to get a finger in the palladium pot. Try ETFS Physical Palladium Shares (NYSE:PALL). PALL’s up 66 percent in the past six months.

5) Wealth management in emerging economies. My fifth and final pick comes from my personal portfolio: Noah Holdings Limited (NYSE:NOAH). A wealth management company, Noah serves high net worth individuals in China. After the company’s IPO in November, shares briefly spiked 30 percent and they’ve since flat-lined around the IPO price. Heavy resistance at $16 per share indicates that the downside risk is limited, and some analysts are calling for earnings growth of 35 percent in 2011 and a target price of $22 per share. The company’s numbers are off the charts with year-over-year growth in net revenue at 210 percent. It makes sense that as the ranks of China’s wealthy swell, so too will the profits at the companies that serve them. Noah Holdings should be perfectly positioned to rake in growing profits from a brand new market.

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