Replicating the Dow Jones Industrial Average
The Dow Jones Industrial Average has historically been the most quoted stock index in the United States. It has several unique features. It uses price weights, it ignores cash dividend payments, and it also treats stock dividends, rights issues, and other corporate actions inconsistently. We show that price indices which use alternative weighting methods and more systematic inclusion criteria perform similarly to the Dow. However, ignoring cash and stock dividends underestimates the long-run returns earned by stock market investors dramatically. If the DJIA had consistently adjusted for dividends and other corporate actions since 1928, the index would have closed at 1,113,047 instead of 28,538 points at the end of 2019.
The authors thank Gary Smith of Pomona College for help with historical return series. Clemens Sialm is an independent contractor at AQR Capital Management, LLC. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Clemens Sialm has received compensation for consulting services and for giving presentations from the following institutions: AQR Capital Management, the U.S. Securities and Exchange Commission, Mercer Advisors, Dimensional Fund Advisors, and MyVest.