Why does the Dow Jones Industrial Average index go up in the long run although the constituents have changed since created?

Question

I'm aware that there are 30 constituents in the Dow Jones Industrial Average and has always been since the index was created in 1896, but why and how does this index keep going up in the long run since created although the underlying constituents have changed?

Answer 1

What makes the market as a whole return a profit over time is that businesses, on average, are profitable, and owning a share of the business means you earn a share of the profits. This drives the basic "market rate of return", which over the long run has averaged somewhere around 8%.

Whether that is expressed as dividends, share price growth, or both varies from stock to stock, though there has been what I consider an unhealthy shift of emphasis to share price growth at the cost of lower dividends; this pressure creates some perverse incentives for upper management.

The Dow, S&P, etc. are selected subsets which try to provide a summary of (a portion of) the market. Since in average the market is trending upward in the long run, they do too.

Answer 2

If a new constituent is added, and another one dropped is because the newly added better suits the criteria for the index than the old one.

The index level does not change at all with this (simple math). What changes is the profitability and size of the companies.

I honestly find the question mind boggling if you know what an index is. Think of the SPX; it contains more or less the 500 biggest / most successful companies on the US. Do you think the biggest 500 companies in the US are bigger today or a 100 years ago? If you think the former, you should also understand why the index grew.

Answer 3

The index has a divisor. When securities are added or removed from the index, the divisor is adjusted, as well as when there are corporate actions such as stock dividends and stock splits. Read these at Investopedia and Schwab