Blue chip stocks are generally issued by large, well-established companies that have a history of steady growth. These companies are typically financially sound, they’re generally considered lower risk, and many blue chip stocks also pay dividends.
In other words, blue chip stocks are the big, stable ocean liners of the equity markets, not the smaller more volatile jet skis. When you’re constructing a portfolio, you may want to consider these large-cap stocks in the slow-but-steady corner of your equity allocation as part of your diversification strategy.
A Closer Look at Blue Chip Stocks
First, let’s answer the obvious questions: Why blue? Why chips? The origin of the term “blue chip stocks” is believed to originate with the game of poker, where traditionally the blue chips have the highest value.
While there is no fixed definition for blue chips, generally speaking, blue chip stocks are chiefly known for being stable and reliable. Blue chip companies can also share some other characteristics.
Common Traits of a Blue Chip Stocks
• They’re well-known. Blue-chip stocks aren’t limited to a single industry, but can be found in grocery aisles and on entertainment channels. Companies like Disney, Coca-Cola, and IBM are all considered blue chip stocks.
• They’re industry leaders. Often a stock has earned its blue-chip reputation by innovating over time, and becoming a market leader — often being among the top three companies in a given sector.
• They’re worth billions. Many blue chip companies have a market cap of $10 billion or more, but many are larger. Market capitalization is a measure of a company’s value, and it’s calculated by multiplying the share price by the number of shares outstanding.
• They’re well established. Most blue chip stocks are not newcomers. Rather they’ve demonstrated a history of financial stability, which can make them an important part of a defensive investment strategy.
• They’ve weathered different market conditions. Owing to their longer histories, many blue chip stocks have overcome various market challenges, but that does not make them “safe” investments.
• They’re on an index. You’ll often find blue chip stocks listed on the Dow Jones Industrial Average, S&P 500 Dividend Aristocrats, or the Bridgeway Blue Chip 35 Index.
• They pay dividends. Blue chip stocks typically pay out dividends, or a share of the company’s profits, to shareholders.
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10 Historically Blue Chip Stocks
Here are 10 companies that have been historically considered blue chip. This list does not include all blue chips, but is a selection of some that are well known:
• 3M
• Coca-Cola
• UnitedHealth Group
• IBM (International Business Machines)
• Johnson & Johnson
• JP Morgan Chase
• Microsoft
• Procter & Gamble
• UPS (United Parcel Service)
• Walmart
These companies have been around for decades, and because of their consistent performance history, they’re considered blue chip stocks today. You may want to consider them when you’re thinking about portfolio diversification.
In addition, a few newcomers (or relatively new companies) have joined the blue chip party, such as Amazon, Apple, and Alphabet.
Advantages and Disadvantages of Investing in Blue Chip Stocks
Like any investment strategy, blue chip stocks have their potential benefits and drawbacks. Before investing in blue chip stocks, you may want to weigh the positives and negatives of these types of stocks on your overall investment strategy.
Advantages
Blue chip stocks have their fair share of benefits:
• They have a track record. Typically, blue chip stocks have been around for a while and are listed in some of the most well-known stock indexes. Some of these indexes can have stringent rules that only the most financially stable companies could meet.
• They’re big. Many of these companies are global in reach, and have the potential to grow faster, secure bigger loans, and continue to compete in the market. Thus, blue chip stocks may be more stable than smaller companies in their sectors — but with the resources to innovate and maintain their status.
• They can be lower risk. Blue chip stocks are often considered low risk because of their size and market history in the market. Many of them also pay dividends, which benefits investors.
• They’re highly liquid. Because these companies trade frequently, but are typically not volatile, investors can generally be confident in these stocks’ value when selling.
• They’re easy to follow. The companies behind many blue chip stocks tend to be well known, which means announcements and news around them is likely to make the front page of the financial section.
Disadvantages
There’s no such thing as a “sure thing,” especially in investing, and the drawbacks of blue chip stocks prove this point. Here are a few cons to keep in mind when considering blue chips for your portfolio.
• They may fall harder. The old adage “the bigger they are, the harder they fall” may apply here. Just because a blue chip stock has a solid history does not ensure a profitable future.
• Limited growth. Though these companies typically have longevity on their side, they are often past their prime growth years. This is why blue chip companies also have a reputation for being low risk.
• They may be expensive. Blue chip stocks tend to be well-known brands and often a highly desirable part of people’s investment strategies. For that reason, you’re unlikely to get a deal on them.
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Investing in Individual Blue Chip Stocks
Like a well-balanced meal, investing in blue chip stocks can be one part of a healthy investment strategy. Those looking to make blue chip stocks a part of their balanced investment diet may first consider investing in individual stocks.
If the price per share is too steep for an investor’s budget, they might want to consider fractional share investing, which allows the purchase of a fraction of a stock instead of the whole share, starting at just $5. Restrictions do apply for fractional shares.
Choosing to invest in an individual stock might be a good way to get a feel for the market, or it might be a way to take a more active investment strategy. Either way, a brokerage can handle an investor’s single blue chip stock purchase.
Blue Chip Funds: An Alternative to Individual Stocks
If no individual stock strikes your fancy, but you still want to get into the blue chip game, you might consider investing in index funds or ETFs that focus on blue chip stocks.
Index funds and ETFs typically hold a diversified basket of stocks, often in line with a stock market index that tracks a segment of the market. Choosing an index fund or ETF that tracks large-cap stocks, the S&P 500, or the Dow Jones Industrial average can be one way to invest in a wide range of blue chip companies and add diversification. Investing in a blue chip fund or an ETF is investing in a portfolio of companies that a broker has selected.
The Takeaway
A company’s stock earns a blue chip designation when they have a strong performance history, consistent returns, excellent financials, and they’re considered industry leaders.
For investors who are ready to start investing, blue chip stocks can be a solid choice — but typically not one that’s likely to deliver a lot of growth or big returns. That said, blue chips are often viewed as being conservative. Being conservative can be an important part of an investment strategy, but it’s like a balanced diet. It may not be healthy to eat the same thing day after day, just as it’s not wise to invest only in bigger, more conservative options — but include other investments as well.
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