The Dow Jones Welcomes New Tech Giants: Nvidia and Sherwin-Williams Take Center Stage

The Dow Jones Industrial Average (DJINDICES: ^DJI) is undergoing a significant transformation as Nvidia (NASDAQ: NVDA) replaces Intel and Sherwin-Williams (NYSE: SHW) takes the place of Dow Inc. This marks the third major shift for the 128-year-old index in the past five years.

Understanding these changes provides insight into how major stock market indexes evolve.

Image source: Getty Images.

Grasping Index Mechanics

Most stock indexes, such as the S&P 500 and Nasdaq Composite, prioritize larger companies based on their market capitalization. For instance, Apple has a market cap about 11 times that of Coca-Cola, thus receiving a higher weighting in the S&P 500. Conversely, in the Dow, Apple’s position is lower, ranking as the 12th highest, due to the index being price-weighted.

Within the Dow, companies with higher stock prices have greater weightings. Currently, UnitedHealth Group tops the index with a stock price of about $564.50, whereas Intel is the lowest at $23.54. This leads to UnitedHealth representing 8.8% of the index as opposed to just 0.4% for Intel.

Stock splits do not impact the S&P 500 or Nasdaq Composite, as these splits do not alter a company’s overall market cap. However, in the Dow, a higher stock price from a lower share count significantly boosts a company’s weighting.

Due to recent stock splits, both Nvidia and Sherwin-Williams can now join the index, where they would have otherwise had excessively high stock prices that would skew its balance. Nvidia is projected to hold the 21st position in terms of weighting, whereas Sherwin-Williams will be sixth. Some might argue Nvidia warrants a higher position, but it’s essential to view the full context.

Tech’s Ascendance in the Index

With Nvidia stepping in for Intel, the Dow now features a top-tier chip maker, marking a shift from an established player to a company at the forefront of technology. Importantly, this change solidifies the presence of the three largest U.S. companies—Nvidia, Apple, and Microsoft—all participating in the Dow. The tech sector continues to dominate the S&P 500, accounting for 31.7% of the index, and has now become the largest sector in the Dow as well.

The inclusion of Salesforce in 2020 has further increased tech representation, with now six components in the Dow, including Microsoft, Apple, Nvidia, Salesforce, International Business Machines, and Cisco Systems. Additionally, Amazon was added earlier this year, incorporating substantial tech influence from their cloud services.

Microsoft ranks as the third highest-weighted company in the Dow, while Salesforce will be eighth once Sherwin-Williams enters. Despite Nvidia’s lower weighting, technology remains a significant share within the index, looking forward to future growth as Nvidia potentially outperforms its peers.

Enhancing Materials Sector Representation

While the Dow has various industrial companies like Caterpillar and Honeywell International, Dow Inc. previously stood alone as the sole representative of the materials sector. The addition of Sherwin-Williams not only raises the sector’s weighting due to its higher stock price but also provides a stronger representation of materials than Dow Inc.

Sherwin-Williams extends beyond paint with a comprehensive range of solutions including stains, sealers, and coatings for various industries. For example, their products are crucial for protecting structures against corrosion, vital for industries from construction to energy.

Like Nvidia, Sherwin-Williams has delivered exceptional market performance, soaring over 50% in the last year, doubling over five years, and increasing nearly fivefold in the past decade. Its robust growth thus makes it an ideal candidate to reflect the materials sector in the Dow.

Shifting Foundations of the Dow

Traditionally, the Dow consisted mainly of established blue chip companies known for paying dividends. It represented a more value-oriented market, while the Nasdaq was characterized by growth, with the S&P 500 bridging the gap.

Recent additions of non-dividend paying components like Amazon and companies with minimal dividends like Nvidia and Salesforce have visibly decreased the Dow’s overall yield. Despite Sherwin-Williams having increased its payout for 45 consecutive years, it currently yields only 0.8% because of its soaring stock value. In contrast, Dow Inc. offered a much higher yield of 5.8%.

The updated Dow Jones Industrial Average reflects a shift toward growth-focused leaders, paralleling trends in the S&P 500. This evolution pressures index components to emphasize future growth instead of just maintaining consistent dividend increases. Dow Inc., which has maintained its dividend since spinning off from DowDuPont in 2019, contrasts with Intel, which suspended its dividend during declining earnings.

These recent updates to the Dow reveal an overarching shift toward prioritizing a company’s forward trajectory rather than its current standing. For long-term investors, this might present opportunities, provided that expectations are met. However, this could also lead to increased volatility among major indexes, including the Dow.

Investors seeking substantial passive income may need to explore other areas of the market outside the major indexes for better yield opportunities.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has positions in Caterpillar. The Motley Fool has positions in and recommends Amazon, Apple, Cisco Systems, Microsoft, and Nvidia. The Motley Fool recommends Intel, International Business Machines, Sherwin-Williams, and UnitedHealth Group and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.