Despite covering relatively few stocks, the Dow Jones Industrial Average is often considered a whistleblower. Its thirty constituents have undergone significant changes, and while the index still includes many slow-growth stocks, it also includes many of today’s largest and most dynamic companies.
This means that some companies in the Dow Jones index will continue to fly high. If you want exposure to the Dow Jones and the potential for significant growth, these stocks could serve you well over time.
Amazon
Indeed, Amazon‘S (NASDAQ: AMZN) The market cap of $1.9 trillion makes growth a challenge. It means it needs to generate more sales and profits than many smaller companies to achieve the same growth rate.
However, Amazon has found a unique solution. The online sales activities, which are responsible for the largest source of revenue, are low-margin businesses and support smaller, more dynamic businesses. That includes advertising, subscriptions, and third-party merchant services.
Moreover, Amazon Web Services (AWS), the cloud computing company, accounted for $25 billion of Amazon’s $143 billion in revenue in the first quarter of 2024. Still, thanks to higher operating margin, it accounted for $9.4 billion of Amazon’s more than $15 billion. in operating income.
The AWS segment gives it a much smaller base with which it can grow its profits faster. In fact, net profit of $10 billion in the first quarter rose 225% from year-ago levels. That increase likely contributed to Amazon’s nearly 60% share price rise over the past year.
While triple-digit earnings growth is unlikely to be sustainable, it makes the price-to-earnings ratio, near multi-year lows, look cheap. Such conditions should strengthen Amazon’s growth, despite its size and stability.
Visa
Despite its enormous size, Visa (NYSE:V) has enormous growth potential. The global payments network continues to play a more crucial role in the economy as society becomes increasingly cashless.
It remains a leading (or arguably dominant) service provider with its credit cards, debit cards and merchant terminals. By 2023, 61% of all credit cards in the US were from Visa. This was way ahead MasterCard at 25% and American Express at 11 o’clock%.
Given the volume of global transactions, this amounts to a staggering gross payment volume, from which Visa collects a small fee.
However, the largest source of revenue is data processing costs. This concerns services such as clearing, settlement, network access and other related services. International transaction fees and other services make up the remainder of revenue.
In its second fiscal quarter (ended March 31), Visa reported revenue of $8.8 billion, up 10% from year-ago levels. Similarly, net profit of $4.7 billion also increased by 10%.
This growth has helped push consumer finance stocks up more than 20% over the past year. Furthermore, its price-to-earnings ratio of 31 is below the average multiple of 35 over the past five years, a factor that could attract more buyers. Given industry trends, Visa’s rise should continue for a long time.
McDonald’s
Granted, investors may not look at it favorably McDonald’s (NYSE:MCD), given concerns about rising prices and wages. Media reports about the dreaded “$20 happy meal” may have helped push restaurant stocks into correction territory.
However, a $20 happy meal probably won’t happen anytime soon. Even if it were, McDonald’s business model insulates the company from these effects. The bulk of the company’s high-margin revenue comes from building rentals and franchise fees – fixed amounts that do not vary with sales. Also, the 4% to 5% of gross sales attributable to the company is likely to rise with inflation, mitigating the effects of rising prices.
Financial values continue to show an upward trend. In the first quarter of 2024, revenue of $6.2 billion increased 5% from year-ago levels. With that increase, the company earned more than $1.9 billion, an annual increase of 7%.
Plus, investors shouldn’t forget the annual dividend of $6.68 per share. The dividend yield of 2.6% is about double that S&P500 average 1.3%. More importantly, it has increased annually since McDonald’s introduced the dividend in 1976. That rising return makes it something to hold on to, especially for long-time shareholders.
Furthermore, its price-to-earnings ratio of 22 is below the five-year average of 28, allowing potential shareholders to buy at a discount. Because investors recognize that rising prices are unlikely to derail McDonald’s, they are likely to have a more positive view of the stock.
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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. American Express is an advertising partner of The Ascent, a Motley Fool company. Will Healy has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Amazon, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
These 3 Dow Stocks Will Rise in 2024 and Beyond Originally published by The Motley Fool
