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Compared to other US indices like the S&P 500, the Dow Jones Industrial Average doesn’t tend to get as much attention. Yet, the index has delivered some fairly robust gains over the years.
Over the long run, it’s averaged a 10.9% total annualised return. And in more recent years, this rate’s been slightly higher at around 12% since 2020. What does this translate to in terms of money?
Since 2020, the Dow Jones is up by 67%. But when factoring in dividends paid along the way, the total return reaches closer to 76.6%. So that means anyone who invested £10,000 in June 2020 is now sitting on £17,660. That’s certainly nothing to scoff at. But it pales by comparison to the performance of some of its constituents.
For example, over the same period:
- Apple (NASDAQ:AAPL) is up 138%.
- Microsoft is up 152%.
- Visa is up 91%.
- Walmart is up by 148%.
- RTX Corp is up by 116%.
This goes to show that by investing in only the best businesses, investors can potentially unlock substantially greater returns than simply relying on index funds. Of course, just because a stock’s performed well in the past doesn’t mean it will continue to do so. So investors need to dig deeper to determine what’s driving the share price and what threats lie ahead.
Zooming in
Let’s take a closer look at one of the largest Dow Jones businesses in the world today – Apple. Being such a large business, there are a lot of moving parts that contributed to its recent success. However, two of the key drivers were:
- A significant expansion of its services business, like the App Store, Apple TV+, and Apple Pay, paved the way for high-margin recurring revenues.
- It enjoyed a massive wave of mobile phone upgrades between 2020 and 2022 as 5G network infrastructure was rolled out.
Combined with the company’s continued brand strength and pricing power, revenues have climbed steadily, with profits almost doubling from $57.4bn to $93.7bn over the last five years. And with the business venturing into the world of artificial intelligencer (AI), analysts expect even more growth and margin expansion on the horizon.
That certainly suggests good times lie ahead for this tech enterprise. But even the biggest businesses in the world have their weak spots. So what threats do investors need to be wary of?
Risk versus reward
Right now, the most immediate threat is the growing trade tensions between China and America. Today, the bulk of Apple’s product manufacturing is done in China – something the US administration has explicitly stated it’s not happy about. But beyond the logistical complications and expenses of moving manufacturing back to the US, a sudden departure from China also introduces significant political risk.
Upsetting the Chinese government is not good for business, especially in Apple’s case, where around 20% of its sales come from. Even if this complex situation is resolved favourably, the company’s also facing regulatory pressure at home relating to its competitive practices, most notably its App Store fees.
These headwinds are undeniably problematic. And it’s up to investors to determine whether these risks are worth taking. Personally, I think there are lower-risk opportunities within the Dow Jones worth exploring.
