“Blue-chip stocks” refer to stock market shares of very well-known, established companies with solid track records for financial success. Investing in blue-chip stocks can be a great move for the right investor, but it’s important to understand their pros and cons. Join us for an overview of the characteristics of blue-chip stocks, examples of blue-chip companies, and the best ways to invest in them.
What Are Blue-Chip Stocks?
The term “blue chips” was initially borrowed from poker, where literal blue chips traditionally had the highest value in a three-color chipset. In the world of investing, a blue-chip stock tends to exhibit the following characteristics.
- Longevity
Blue-chip companies don’t tend to be those that have only been around for a few years. No matter how great a new company has performed thus far, to achieve blue-chip status, they’ll have to prove their staying power, which is something that can only be achieved with time. A true blue-chip has been in business for decades, weathered the storms of multiple recessions, and lived to trade another day.
- Name Recognition
Due to how well established they are, you’re likely to recognize the name brands behind most blue-chip stocks instantly. While this alone doesn’t necessarily make a stock a blue-chip, it’s a trait that most of them do share. These companies tend to be leaders in their industries with proven business models.
- Market Capitalization
Blue-chip stocks are also large-cap stocks, which means that the total value of all of their outstanding shares is at least $10 billion. Many appear on major indexes such as the Dow Jones Industrial Average and the S&P 500.
- Reliability
While no stock is a sure thing, blue-chip stocks have developed impressive reputations as far as earnings and performance go. They’re the kind of companies where it’s pretty rare to see their value tank overnight.
- Dividends (Often)
While not every blue chip stock pays out dividends to its shareholders, many of them do. Because their business models are so successful, they tend to have the cash flow to reward their investors with regular dividend payments.
What Are Blue Chip Stocks Used for?
Blue chip stocks tend to be the most popular among long-term investors looking to mitigate risk. Due to their solid reputations, they’re often perceived as more stable than small-cap stocks with higher volatility.
Keep in mind that even the most reputable blue stocks aren’t necessarily averse to risk. The bankruptcies of both General Motors and Lehman Brothers are prime examples of how disaster can strike even the most powerful companies. In general, however, catastrophes like these tend to be the exception rather than the rule among blue chips.
Some investors also use blue-chip stocks with high-paying dividends as income stocks. By purchasing dividend blue chips and holding them for years, income investors can generate reliable dividend payments that they can count on as income after they retire.
Blue-Chip Companies
There’s not necessarily a hard and fast list of blue chip stocks, but there are plenty of companies in every market sector that fit the bill. Some of the most popular include:
- Apple (APPL)
- Boeing (BA)
- Chevron (CVX)
- Coca-Cola (KO)
- Home Depot (HD)
- Intel (INTC)
- Johnson & Johnson (JNJ)
- McDonald’s (MCD)
- Microsoft (MSFT)
- Visa (V)
- Walt Disney Company (DIS)
Why Invest in Blue Chip Stocks
If you’re a relatively hands-off or long-term investor who is looking to buy a stock that you can hold for years to come, then blue chips are a great place to start your search. They can also help provide a bit of leverage to your overall portfolio, even if you do a mixture of long-term investing and short-term trading.
Warren Buffett is one of the more famous fans of long-term investing in high-dividend blue-chip stocks, proving that it can be a profitable strategy. But it’s also important to realize exactly how these stocks can make you money and that it’s not always due to a rise in their prices.
Take Coca-Cola (KO), for instance, which first began trading for $40/share in September of 1919. As of September 2019, the company’s shares were trading for around $50/share. If you think a full century sounds like a long time to wait for a $10 return, then you’re not wrong – but not so fast.
What you have to factor in is that Coca-Cola a) pays consistent dividends and b) has experienced 11 stock splits (wherein companies increase their number of available shares) since its market debut. Considering the splits alone, one share bought in 1919 would have since multiplied into 9,216 shares today.
How to Buy Blue Chip Stocks
One of the key components of investing in blue-chip stocks is to research the companies that are right for you. Investing in brands that you know and use yourself is always nice because it tends to be less of a chore to stay on top of current news.
Be sure to research the company’s stock market history and ask questions such as:
- Does the stock pay consistent dividends?
- Does it tend to split, and how often?
- What’s the average yearly growth rate?
- How much does it currently cost?
The last is a particularly good question to ask during a bear market, market correction, or recession. For instance, many stocks, including several blue chips, were available to purchase at unusually low rates during the aftermath of the Coronavirus pandemic. This is known as “buying the dip” and can be a profitable strategy.
Beyond that, all that’s left to do is sign up for a brokerage account if you don’t already have one. Almost all major online brokers (such as Charles Schwab, TD Ameritrade, E*Trade, etc.) now offer commission-free trading. Once your account is set up, simply fund it with money, type in the company’s ticker symbol, and buy as many shares as you want to invest in.
Due to the fact that many blue-chip stocks tend to offer slow and steady returns, you might even consider opening a separate brokerage account dedicated specifically to long-term holds. If you’re a day or swing trader, this can remove the temptation to sell them ahead of their time to fund shorter-term trades.
We hope this has helped give you a solid overview of blue-chip stocks and whether or not they’re right for you!
