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 10 best stock sectors for 2011

One of the toughest parts of investing is being in the right stocks at the right time. Here are the Top 10 sectors that I believe have the best prospects for a break-out year in 2011.

One of the toughest parts of investing is being in the right stocks at the right time. In general, sectors move together on a combination of factors: the macroeconomic outlook, changes in demand, materials costs and the regulatory outlook among other things. Based on those considerations, here are the sectors that I believe have the best prospects for a break-out year in 2011:

1) Rare earth stocks. Rare earths mining companies seek out or dig up deposits of rare earth metals – a collection of 17 chemical elements that are increasingly used in high-tech products from iPhones to wind turbines and electric vehicles. Rare earth stocks exploded upward at the start of the year on news that China is hacking exports of the metals by 35 percent through the first six months of 2011. That’s not good considering the fact that China produces 95 percent of the world’s rare earths supply. Rare earth mining stocks outside of China will have to make up for the plummeting supply in coming years. While shares in rare earths companies have cooled off recent weeks (putting several of them in the red since the start of the year), I fully expect the long-term trend to be intact. Among my favorite stocks in the sector? Avalon Rare Metals Inc. (AMEX:AVL), which is up 19 percent on the year.

2) Technology IPOs. A number of multi-billion dollar technology IPOs appear to be on the slate in 2011. From LinkedIn to Groupon, expect lots of press, surging prices and a good opportunity to make a quick buck. Check out my unofficial tech IPO calendar for 2011 to see all the tech companies that might IPO this year.

3) Oil stocks. Political turmoil coupled with rising demand pushed oil over $100 a barrel in London for the first time in three years. The IEA expects demand to grow 1.7 percent to 89.3 million barrels this year, and that’s pushing up share prices for the majors and small-cap exploratory companies as well. Shares in Exxon Mobil Corporation (NYSE:XOM) are up 13 percent since the start of the year.

4) Precious metal stocks. It’s been a tough start to the year for gold and silver as investors have cheered corporate profits and robust consumer spending. That’s had some predicting gold’s peaked, but I’m convinced the long-term outlook for gold – and particularly silver – is still up. Central banks became net buyers of gold last year, and they’re expected to continue that trend in 2011. The SPDR Gold Trust (NYSE:GLD) is down 4.5 percent and the iShares Silver Trust (NYSE:SLV) is up 2 percent since the start of the year.

5) Fertilizer stocks. Rising food costs are the product of inflation and rising demand. As producers try to cope with growing demand, they’ll rely on phosphates, nitrates and potash to try to squeeze more food out of the same acreage. That’s caused an explosive surge in small-cap phosphate exploration stocks. Allana Potash Corp. (CVE:AAA) is up more than 100 percent since the start of the year. Bellweather fertilizer stocks like Potash Corp. (NYSE:POT) and The Mosaic Company (NYSE:MOS) are both up more than 20 percent as well.

6) Copper stocks. The looming threat of a supply crunch has helped push copper prices above $10,000 per ton for the first time in history. Analysts are calling for a worldwide deficit of about 500,000 tons of copper this year, and that will help propel copper mining stocks after what’s already been a great start. Shares in small-cap and mid-tier copper stocks have performed the best to date with Augusta Resource Corp. (AMEX:AZC) rising 21 percent YTD.

7) Uranium stocks. Uranium prices have been on a tear rising 70 percent in the past seven months. In January alone, the spot price for uranium shot up 17 percent to $73 a pound. Uranerz Energy Corp. (AMEX:URZ) in particular has been shining with its shares up 35 percent this year. As countries around the world look to go green, nuclear power will get less press than wind and solar, but it will likely be the backbone of any plan to move away from coal.

8) Coal stocks. Flooding in Queensland and rapidly-growing demand in China have led to a surge in coal prices around the world. If oil prices remain high, coal will be the go-to substitute for power generation in many countries around the world. Year-to-date, the Market Vectors-Coal ETF (NYSE:KOL) is nearly flat, but its up almost 40 percent over the past six months.

9) Blue chip stocks. As the dollar begins falling relative to currencies in other countries, shares in high-quality, blue-chip U.S. stocks begin to look very attractive – particular blue-chip stocks with international exposure. The beneficial exchange rates should make U.S. exports look more attractive and will overfill the coffers at America’s biggest corporations. Shares in General Electric Company (NYSE:GE) are up more than 19 percent since the start of the year.

10) China e-commerce stocks. A recent report by Credit Suisse predicts that e-commerce will grow by 400 percent through 2015 in China. With most of the leading Chinese retail sites in private hands, investors on American exchanges don’t have a whole lot of options to cash in on the trend outside of the Amazon-like site E-Commerce China Dangdang, Inc. (NYSE:DANG). Taobao.com controls 75 percent of all e-commerce transactions in China. If they IPO in 2011 or 2012, I’d recommend cleaning up your portfolio and taking a long position.

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A savior for Microsoft (MSFT)?

If Windows Phone 7 pays off, it could do wonders for investors’ perceptions of Microsoft, especially if the company can create a thriving app marketplace similar to the iPhone’s AppStore (NASDAQ:AAPL). That could add a whole new revenue stream to the giant’s bank account, and that would make investor’s swoon.

It seems Microsoft (NASDAQ:MSFT) is the company everyone loves to hate. And the sad fact is, it’s because just about every human in the United States has benefited from their products at one point or another. Now, one gets the sense that the giant’s against the ropes.

Barclays (NYSE:BCS) cut their earnings estimates for Microsoft on slowing PC shipments, a leading gaming exec jumped ship for Amazon (NASDAQ:AMZN), and the company’s COO, B. Kevin Turner, just sold 141,407 shares. The Kin was a failure, the Wii’s cutting into their gaming market and their search deal with Yahoo! (NASDAQ:YHOO) hasn’t done much yet.

Can Bill Gates and Steve Ballmer re-invigorate the giant? Or is it time to turn the company into a dividend-paying value stock like General Electric Company (NYSE:GE)?

Perhaps not yet. Microsoft has just released the first ad for their Windows Phone 7, a device that they’re pinning much of their hope for the future on.

“This is make-or-break for them. They need to do whatever it takes to stay in the game,” Jonathan Goldberg, an analyst with Deutsche Bank, told TechCrunch. They don’t need Windows Phone 7 to crush the iPhone, but they need it to stop people from switching to the iPhone, and they’re spending the cash to make that happen. Marketing efforts for the new mobile OS are estimated to be near half a billion dollars (and that excludes the phone’s substantial development costs).

If it pays off, it could do wonders for investors’ perceptions of Microsoft – especially if they can create a thriving app marketplace similar to the iPhone’s AppStore (NASDAQ:AAPL). That could add a whole new revenue stream to the giant’s bank account, and that would make investor’s swoon. Thankfully, too, the phone’s on tap for an October release; well ahead of the holiday season.

Here’s their first ad for Microsoft’s Windows Phone 7. Does it make you want to buy it?