Why Nvidia in the Dow Is Bad News for Dividend Investors

Nvidia’s entrance into the Dow Jones Industrial Average may just be the end of an era.

The blue-chip stock market measure welcomed two new companies last week, including the sexiest stock alive, Nvidia, and Sherwin Williams. It was at the expense of two long-standing members, Intel and Dow Inc., and sent a loud and clear message to dividend-seeking advisors about the 30-stock index: Your job just got harder.

Not Your Average Bear

Nvidia, as dynamic a force as it is, does not resemble a historic Dow index component. Traditionally, all 30 Dow stocks had average to above-average yields, generally anywhere from 2% to 5% or even higher. That has changed:

• While it was once more focused on income investing, the S&P 500 now yields just 1.2% on average. 
• With Friday’s stock swap, there are 11 stocks in the Dow now yielding less than the average. 
• One of the stocks in the index, Boeing, doesn’t pay a dividend to investors at all. 

So, what’s the big deal? The index that investors consider a basket of “blue chip” stocks has taken a hard turn toward growth, and away from mature dividend companies. It highlights a growing trend toward high-flying tech firms. Advisors should see this as a signal that equity income has become an afterthought. But as with so many aspects of investing, there’s opportunity for advisors with clients that still enjoy getting regular quarterly cash payments out of company profits.

Yield to Pedestrians. Many public companies now treat dividends and yield-seeking investors differently than in the past. Cash flow is increasingly used to buy back stocks instead of paying dividends, which has made them harder to find. But, there are easy-to-access ETFs that can gain exposure to the Dow in a variety of ways. 

The most common way is obviously via SPDR Dow Jones Industrial Average ETF Trust (DIA), which has traded since 1998. However, there are other products that strip out some of the lowest-yielding dividend stocks. The Invesco Dow Jones Industrial Avg Div ETF (DJD) accesses the Dow on a yield-weighted basis and sports a payment of around 3% — roughly double that of DIA. There are a handful of other Dow-based ETFs that can help, too.

The Dow’s gradual shift toward a more S&P 500-style index — where yield is largely ignored, and Magnificent Seven stocks (Nvidia is the fourth to join) play a greater role — is an announcement to advisors and their clients: Dividend income can be a priority, but it’s going to become a lot harder to find.