On June 8, S&P Dow Jones Indices dropped Verizon from the Dow Jones Industrial Average and replaced it with Alphabet. Wall Street yawned. But history screams something else: getting kicked out of the Dow is one of the best things that can happen to a stock.
The Numbers Don't Lie
A study by Bespoke Investment Group tracked every stock booted from the Dow since 1970. The results are brutal — in a good way. Over the next 12 months, those stocks outperformed the S&P 500 by an average of 5.2%. The no-longer-blue-chips didn't just survive; they thrived. Consider Eastman Kodak, dropped in 2004. A year later, it was up 28% while the Dow barely moved. Or Alcoa, tossed in 2013 — it returned 34% in the following year, crushing the index.
“Being kicked out of the Dow is a scarlet letter that smart money knows to buy.” — Bespoke Investment Group
The Psychology of Removal
Why does this happen? Two reasons. First, the Dow is a price-weighted index, not a market-cap-weighted one. It's a relic of the 1890s, when Charles Dow added up stock prices and divided by twelve. Today, a $300 stock has more sway than a $100 stock, regardless of the company's actual size. So when a committee removes a stock, it's often because of price fluctuation, not business fundamentals. Verizon was the second-lowest-priced stock in the Dow — at around $40, it was a pinball in the index. Alphabet, at $170, gives the Dow more heft. That's not a verdict on Verizon's business. It's a quirk of math.
Second, the removal triggers forced selling. Index funds tracking the Dow dump the stock. Pension funds rebalance. The stock gets hit with a wave of mechanical selling that has nothing to do with its actual value. That creates a temporary price drop — a discount for those paying attention. Once the selling exhausts itself, the stock tends to bounce back. Hard.
Verizon's Moment
Let's look at Verizon. The telecom giant's stock has been a laggard for years, down 15% over the past five years while the Dow surged. Revenue growth? Flat. Debt? $150 billion. The narrative is grim: a dinosaur in a 5G world, bleeding customers to T-Mobile. But that's exactly the kind of pessimism that makes for a contrarian bet. Verizon still generates $30 billion in free cash flow annually. It pays a 6.5% dividend yield — one of the highest in the Dow. And now it's free from the index's price-weight straitjacket. Management can invest in fiber, buy back shares, or cut debt without worrying about the Dow committee's next move.
History suggests the first year post-ouster is the sweet spot. In the 12 months after removal, the average stock gains 8.5% — beating the market by a wide margin. For Verizon, that would mean a share price near $48, up from $40. Toss in the dividend, and total return could hit 20%. Not bad for a stock everyone loves to hate.
The Catch
Of course, not every exit is a winner. General Electric was booted in 2018, right before its collapse. But GE's problems were deep: a broken balance sheet, a failed strategy, and a CEO who described the company as a “wreck.” Verizon isn't GE. It's a cash machine with a hated business. That's a different kind of problem — and a better setup for a rebound.
Alphabet, for its part, enters the Dow at a precarious time. The stock has doubled in two years, and antitrust threats loom. The Dow curse works both ways: stocks added to the index often underperform in the following year. Since 1970, new Dow members have lagged the S&P 500 by an average of 2.1% over the next 12 months. Alphabet might be too big to fail, but it's not too big to stumble.
The Verdict
Buy Verizon. Sell Alphabet? Not exactly — but don't expect the addition to be a tailwind. The Dow is a dinosaur index, and its changes are noise. But noise creates opportunity. Verizon's ouster is a signal, not a sentence. The stock is cheap, cash-rich, and now free from a committee that didn't want it. That's a setup history says you should bet on.
