- A blue-chip stock is a stock from the market’s highest-quality companies, known for their low risk and reliable performance.
- Blue-chip stocks are stable and pay high dividends, but they are typically expensive and don’t grow much.
- Blue-chip stocks belong in any well-diversified portfolio, though they tend to be favoured by older or more conservative investors.
Investing sometimes gets compared to gambling â€” something prudent investors and financial pros deny, naturally. But the stock market has borrowed one bit of lingo from casinos and card games: blue-chip stocks.
Just as blue chips in poker hold the highest value, so do blue-chip stocks in the stock market. They represent the crÃ¨me de la crÃ¨me of equities â€” the biggest, richest companies. Many of them are household names.
Blue-chip stocks provide a way to invest in stable, good-performing corporations with minimal risk. Plus, they usually pay good dividends.
What are blue-chip stocks?
Blue-chip stocks occupy the most venerated strata of the stock market. As leaders in their industries, these companies have strong histories â€” some are over 100 years old â€” and deliver consistently strong performance. Whether the market overall is up or down, blue chips prove themselves as steady and reliable investments. As a result, their share prices tend to be high.
The blue-chip term came into financial parlance in the early 1920s. According to Wall Street lore, it was coined by a journalist for Dow Jones, Oliver Gingold, as he watched a stock tape ticker reporting trades of shares valued at $US200 or more. He promptly dubbed these companies “blue-chip stocks.”
What makes a stock a blue chip?
No official guidelines exist around the size and value of blue-chip companies. But they do share some characteristics:
- Large market capitalisation: Blue chips tend to be huge, well-financed corporations. Their market capitalisation â€” that is, the total market value of all their outstanding shares â€” is in the high billions, putting them in the category of large-capitalisation (or large-cap) stocks. The cheapest of these large caps enjoy a value of at least $US5 billion; most are north of $US10 billion.
- Growth history: Blue-chip companies display years, sometimes decades, of sustained growth and ongoing prospects. Their share prices rarely jump dramatically, but they can show steady appreciation over time.
- Stock index: Blue chips occupy positions in the major market indexes: the Dow Jones Industrial Average (DJIA), the S&P 500, the Nasdaq 100. A company is often seen to have “made it,” blue-chip status-wise, if on one of these lists, which act as bellwethers for the stock market itself.
- Dividends: While not always a feature, many blue chips pay shareholders a good, steady dividend. As mature companies, blue chips focus less on growth than start-ups and other businesses that need to continually seed development. For blue-chips, the freed up cash flow allows companies to share profits with stock owners through dividend payments. As profit margins grow, the dividends often increase as well.
Blue-chip stock list
Blue-chip stocks include notable names familiar to almost everyone, a trait attributable either to their long histories or to their positions as industry leaders (or both). Some of them include:
- Alphabet (GOOGL)
- Amazon (AMZN)
- American Express (AXP)
- Apple (AAPL)
- Bank of America (BAC)
- Coca-Cola (KO)
- Costco (COST)
- Home Depot (HD)
- IBM (IBM)
- Johnson & Johnson (JNJ)
- McDonald’s (MCD)
- Microsoft (MSFT)
- Starbucks (SBUX)
- Visa (V)
- Walmart (WMT)
Benefits of blue-chip stocks
Investors find a number of benefits in buying shares of blue-chip companies. These include:
- Low volatility: As big corporations, blue-chip companies benefit from economies of scale and also enjoy revenue streams from multiple products and services. While not immune from economic downturns, well-established blue chips are not easily shaken, even in times of market volatility.
- Dependability and transparency: With their long histories and status as industry leaders, blue chips operate with seasoned management teams. The companies’ fame and high profiles tend to keep their operations transparent.
- Rich income: Steady earnings without a need to invest heavily in growth means blue chips can provide steady, strong dividend payments. Next to US Treasuries, blue-chip dividends are the most reliable go-to for income-oriented investors.
Drawbacks of blue-chip stocks
On the flip side, the blue-chip features that work as benefits for some investors act as deterrents for others.
- Low growth: Unless you invested in one decades ago, you won’t make a killing in blue-chip stocks. These are mature companies, for the most part â€” their big-growth days are behind them. They appreciate steadily, but not dramatically. That’s the trade-off for their low risk.
- Expensive: No bargains here â€” blue-chip stocks have been discovered. Because blue chips play in the large-market cap sandbox, the price to buy in on a single share often runs a couple hundred dollars or more. For many younger investors, the share cost far exceeds the level needed to acquire a stock position of any significant size.
- Strong but not invulnerable: Sometimes a sterling reputation can hide the fact that a blue chip is resting on its laurels and failing to innovate. Monolithic corporations can be slow to respond to changing times, consumer demands, and industry trends. Though it happens rarely, blue chips can and do go bankrupt: General Motors and Lehman Brothers are two recent examples.
What is the blue-chip index?
Investors seeking exposure to those companies considered most valuable often turn to indexes as a way to slice a piece of the blue-chip pie. Exchange-traded funds and index (mutual) funds focus provide an entry point into blue-chip investing without the cost-prohibitive price.
These funds basically track “blue-chip indexes” â€” that is, the major stock exchange indexes that include individual blue-chip stocks: the Dow Jones Industrial Average, the S&P 500, and the Nasdaq-100. The funds cherry-pick from the exchanges to populate their portfolios with industry blue chips.
Across the pond, the New Europe Blue Chip Index tracks 30 of the top stocks traded on the Continent. The DAX Index tracks the top 30 companies on the Frankfurt Stock Exchange.
The financial takeaway
The security of blue chips ranks at the top of their appeal to investors. Blue chips’ history of weathering even the stormiest of times puts them in a kind of safe-haven category. This gives investors comfort in knowing these stocks emerge less scathed than their counterparts in rocky times.
These stock-market stalwarts look especially attractive to older investors, who are often risk-averse, dislike volatility, and seek income from their investments. More often than not, younger investors, who want bigger growth and can take chances, avoid blue chips for these very reasons: the lack of flash and hype, and the high price of their shares.
Still, while the weighting varies based on their goals and risk tolerance, all investors can rely on blue-chip stocks as a means to add strength and stability to their portfolios.
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