After a year in which every stock market in the world has risen handsomely, real estate has gone through the roof, and bonds and commodities have soared as well, the witty and bearish Jim Grant, editor of Grant’s Interest Rate Observer, has titled his spring conference, “What’s Left to Go Up?”

I have a suggestion: the good old Dow Jones industrial average.

Yes, the Dow performed well last year, but so far in 2004 (through April 15), it’s down a bit — unlike practically every other market and sector. Small-caps are up 5 percent; Japanese stocks, up 14 percent; the Dow Jones World index, up 7 percent; Internet commerce stocks, up 16 percent. Oil, houses, even bonds — through mid-April, they were all up.

And take the long view. The Dow broke the 10,000 mark last year, but it’s done that many, many times before. In fact, the Dow has penetrated 11,000 seven times since 1999. As of Wednesday, the Dow was 1,345 points below its all-time high, set more than four years ago.

All of this makes me happy because I love the Dow and would rather buy it cheaply than expensively. It is a glorious and mysterious institution. The glory is obvious. It’s been thriving for more than a century. The mystery is how, with just a handful of blue-chip stocks, the Dow has provided a remarkably accurate picture of the entire market while generously rewarding investors who purchase shares of its components.

The Dow was invented as an average of nine railroads and two industrial companies in 1884 by the eponymous Charles Henry Dow, an investment adviser who wanted to give readers of his financial bulletin, the Customer’s Afternoon Letter, an idea of how stocks as a whole performed each day. In 1896, he restructured it into the modern Dow — at first 12, and now 30, stocks across a broad variety of sectors. These 30 have changed over the years, but they manage to track the market with surprising precision.

For example, last year, the Dow returned 28.3 percent while the Standard & Poor 500-stock index, which includes more than 16 times as many stocks, returned 28.7 percent. For the 20 years ended Dec. 31, 2003, the Dow, including dividends, returned an annual average of 14 percent; the S&P, 13 percent. Pretty close.

The Dow has accomplished this feat using crude methodology. Unlike the S&P 500 and most other indexes, it is not capitalization-weighted. In other words, more valuable companies (according to the market) don’t necessarily have more effect on the ups and downs of the average than smaller companies. Instead, the Dow is price-weighted, so that International Business Machines Corp. (ticker symbol IBM), at $93.97 per share on Thursday, has more than three times the impact on the movement of the Dow as Intel Corp. (INTC), at $26.66 — even though Intel has a larger market cap.

What’s impressive about the Dow is the management of its evolution. It doesn’t change very much or very quickly, but the changes have been essential, and they have worked out well. Of the 12 original names on the 1896 Dow, only one remains: General Electric Co. (GE). Many of the others are obscure. Ever heard of American Cotton Oil? Laclede Gas?

Several of the current components have notable longevity. General Motors Corp. (GM) acceded to the list in 1915; DuPont (DD), in 1924; and IBM and Coca-Cola Co. (KO) in 1932. And, while the U.S. economy has changed radically since 1985, half of the Dow companies today were on the list back then.

The editors of the Wall Street Journal, the eventual successor to Charles Dow’s two-page bulletin, typically add (and subtract) two or three companies every few years — mainly to keep the average balanced, so that it looks like the U.S. economy. They also eliminate components that dwindle as businesses and need to be replaced by more robust firms.

On April 8, these three were admitted to the club: American International Group Inc. (AIG), the global insurance giant; Pfizer Inc. (PFE), the world’s largest pharmaceutical company; and Verizon Communications Inc. (VZ), the largest U.S. telecommunications firm. And these three were shown the door: AT&T Corp. (T), a telecom that is only one-sixth the size of Verizon by market capitalization; Eastman Kodak Co. (EK), the photography company, which joined the Dow in 1930 and whose value has collapsed by two-thirds in the past five years; and International Paper Co. (IP), a blue-chip forest-products company in an era when commodity businesses seem less compelling.

With the elimination of International Paper, the Dow now has only six traditional smokestack firms — that is, true “industrials,” in the original meaning of Charles Dow’s term. They are: DuPont; GM; Caterpillar Inc. (CAT), tractors; Alcoa Inc. (AA), aluminum; and Boeing Corp. (BA), aircraft. There are, by my count, four financials, three pharmaceuticals, three retailers (including restaurants), three high-techs, two telecoms, four consumer-products firms (including entertainment), one energy company and four diversified businesses that are tough to classify: GE, United Technologies Corp. (UTX), Honeywell International Inc. (HON) and 3M (MMM).

This is a delightfully diversified portfolio, and it has another advantage: All of the stocks pay dividends, some of them luscious. Altria Group Inc. (MO), the former Philip Morris, with interests in tobacco and packaged goods, currently yields 4.9 percent, compared with 3.4 percent (as of Wednesday’s close) for a five-year U.S. Treasury note (and the top federal tax rate on dividends is 15 percent versus 35 percent for bond interest).

J.P. Morgan Chase & Co. (JPM) yields 3.4 percent; Merck & Co. (MRK), 3.3 percent; Citigroup (C), 3.1 percent. Overall, the Dow last week carried a dividend yield of 1.9 percent, compared with 1.7 percent for the S&P.

The Dow is also cheaper than the S&P by standard valuation methods. The Dow’s price-to-earnings ratio is 20; the S&P’s is 23. The Dow’s price-to-book ratio, the number of dollars it takes to buy a dollar of its average firm’s net worth on the balance sheet, is 2.4, compared with 3.5 for the S&P.

The Dow’s earnings are expected by a consensus of analysts to rise 14 percent this year. Based on that estimate, the Dow’s forward P/E is only 17 — awfully modest for a portfolio of stable, fast-growing companies.

What’s wrong with the Dow? Not much. John Buckingham, who edits the Prudent Speculator, the top stock-picking newsletter of the past 20 years, focuses on overlooked small-caps, but now he’s also recommending several Dow components, including GM, Alcoa and Johnson & Johnson (JNJ).

GM, with revitalized management, ranks No. 3 on the Fortune 500 list for revenue — $195 billion last year, with $3.8 billion in profit. It has by far the most valuable assets of any non-financial company ($449 billion), yet its market cap is only $26 billion — compared with $36 billion for Yahoo Inc. (YHOO). Shares are down one-third from their 2001 high, and the stock yields a hefty 4.3 percent (about the same as a 10-year Treasury bond) and carries a current P/E of just 9.

Buckingham notes that GM is suffering from a large inventory of unsold cars and trucks, but, looking ahead, he sees the company earning more than $7 a share in 2005. Not bad for a stock trading at around $45 today.

Alcoa on Thursday suffered what Wall Street calls a “negative earnings surprise” — profits weren’t as high as analysts had been led to believe. But long-term investors should pay no attention to such nonsense. Aluminum prices rose 13 percent last year, and the Value Line Investment Survey expects them to “rise even further this year based largely on a pickup in both the U.S. and global economies.” Alcoa, with $22 billion in sales, is the world’s largest aluminum producer. It has an excellent balance sheet and a forward P/E ratio of just 13, with a dividend yield of 1.8 percent.

Since last summer, Johnson & Johnson has traded in a narrow band (roughly between $49 and $54 a share). It’s been a smooth ride but, except for the dividend (the yield today is 1.8 percent), not a very productive one for investors. The stock was over $64 two years ago.

Still, this is a spectacular company with a well-balanced product line (among pharmaceuticals, medical devices and consumer products), a gorgeous balance sheet, profit that has risen in a Beautiful Line for decades and a half-century-long tradition of hiking dividends. Best of all, J & J carries a valuation well below its average during the 1990s. Its forward P/E is just 17, enticingly low for a company that Value Line expects to increase earnings at an average of 13 percent annually for the next five years. As Dow Theory Forecasts recently put it, “If you apply J & J’s five-year average P/E to trailing earnings, the stock is worth $75.”

The easiest way to buy the Dow as a whole is through an exchange-traded fund (ETF) called Diamonds Trust (DIA), which you purchase as though it were an individual stock. The price for a share is roughly 1/100 of the value of the index. Diamonds charges only 18 basis points (0.18 percent) in annual expenses, but you have to pay brokerage fees to buy and sell the shares.

A conventional mutual fund that has been a longtime favorite of mine has a near-Dow portfolio. It’s called ING (formerly Lexington, formerly Pilgrim) Corporate Leaders Trust (LEXCX). The fund was launched in 1935, and the idea was to select 30 companies that would survive and thrive for the next 80 years (eventually extended through 2100, when the trust is scheduled to be liquidated). The gimmick is that the portfolio was fixed, changing only with bankruptcies, mergers and spinoffs.

Many of the stocks are Dow components, including Exxon Mobil Corp. (XOM), Citigroup, GE, Procter & Gamble Co. (PG) and DuPont. The fund also includes former Dow stocks ChevronTexaco Corp. (CVX), currently yielding 3.2 percent; Sears Roebuck & Co. (S), 2.2 percent; and Kodak, 2 percent. With an expense ratio of only 63 basis points, Corporate Leaders has performed well, keeping pace with the S&P 500 for the past 10 years but at lower risk. It has trailed the Dow, however.

Pick either fund, or simply choose the components you find attractive. Either way, this is a time to look carefully at Dow stocks. Get ’em while they’re cold.