Verizon Gets Booted From the Dow Jones Industrial Average. Is the Stock in Trouble?

When a stock gets removed from a major index, it can be a concerning sign for multiple reasons. One is that many funds may no longer have exposure to the stock, particularly if they tracked the index. This effectively forces them to sell, putting downward pressure on the stock. Another potential issue is that there may be fundamental reasons for the change that highlight a risk with the stock that investors may not have been previously aware of.

Verizon Communications (NYSE: VZ) is a stock that has, for the most part, done well this year. But recently, investors learned that it had been dropped from the Dow Jones Industrial Average, prior to the start of trading on June 29. What's behind the move, and is the stock destined to decline from here on out?

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Why did Verizon get dumped from the Dow?

The Dow Jones Industrial Average is weighted by price, and with Verizon averaging a modest price of less than $50 recently, it would not have had much of an impact on the index. According to the statement announcing the move, Verizon accounted for just half of a percentage point. Plus, the move was also made to make room for Alphabet and so that the index had greater exposure to new opportunities in artificial intelligence and tech as a whole.

Since the Dow Jones Industrial Average is made up of just 30 stocks, it's highly selective of the stocks it includes. Removal of a stock doesn't indicate that the business is in poor shape. Verizon rival AT&T was booted from the index back in 2015, getting replaced by another tech giant, Apple.

Verizon's stock is down, and that makes it a more attractive buy

In the past month, Verizon's stock has declined by around 8%. Investors may have recently been selling the stock in anticipation of its departure from the top index, and there may still be more downward pressure on it in the near future.

But with strong fundamentals and a fairly safe dividend, it could simply give investors more of a reason to buy the stock in the long run, because as its share price comes down, the yield rises. At 6.4%, it's close to six times the S&P 500's average yield of just 1.1%.

On a year-to-date basis, Verizon's stock remains up around 8% as it had been doing well up until this recent decline. However, with excellent fundamentals, a strong business, and a modest valuation (the stock trades at roughly 11 times earnings), it can be a slam-dunk buy for dividend investors.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.