Jul 12, 2022
What are blue chip stocks?
A blue chip stock is a market leader that stands the test of time: think Apple, Coca-Cola, and Nike. These steady stocks have weathered downturns and paid steady dividends over the long haul, even while other companies crumbled. Oliver Gingold, a journalist for Dow Jones, first used the term in the 1920s, referencing blue poker chips, the most valuable chip at that time. Today, the Dow Jones Industrial Average is composed of 30 blue chip stocks.
In this article, we’ll cover:
- The qualities of blue chip stocks
- Examples of blue chip stocks
- The benefits of blue chip stocks
- The risks of blue chip stocks
- How to invest in blue chip stocks
What qualifies stocks as blue chip stocks?
While there’s no official definition of blue chip shares, almost all experts agree that they’re leading companies that have proved their durability over decades. Some experts, however, exclude companies that don’t pay dividends. Others sweep in companies with exceptionally high valuations, like Amazon or Facebook, even though they are relative newcomers and do not pay dividends.
As a general rule, blue chip companies share the following traits:
- Durability: Blue chip shares boast decades-long track records of profitability; they are solid, long-established companies and household names. Over time, they’ve built trust with investors and their customers, developing reputations as industry leaders.
- Dependability: They are reliable performers, holding their value even during economic downturns. Their growth is usually slow, unlike the explosive rises characteristic of new tech stocks, but it’s also steady. That means sudden crashes are less likely.
- Market cap: Market capitalization, or market cap, measures a company’s value and size. Blue chips are large cap companies, meaning they are valued at $10 billion or more. Their scale and deep pockets give them a competitive advantage.
- Dividends: Most blue chip companies pay dividends to investors. Unlike newer, fast-growing companies, which typically spend their profits on growth, blue chips are so well-established and financially stable that they can share profits with investors.
Examples of blue chip stocks
There’s also no official list of blue chip stocks, but they are an elite group. Among the thousands of stocks trading, most investors recognize fewer than 75 blue chips in the U.S. stock market. The 30 companies that make up the Dow Jones Industrial Average are acknowledged by virtually everyone as blue chips. Some investors take a slightly broader view.
While blue chip companies are rare, they can be found in every market sector. Here are 10 of the best-known blue chips:
|Blue chip company
|Stock ticker symbol
|Johnson & Johnson
The advantages of blue chip stocks
Blue chip stocks are popular because they’re seen as dependable. For the most part, investors can count on them for steady long-term growth, although no investment is without risk. Here are the main reasons people choose blue chips:
- Dividends: Blue chip companies rarely decrease or eliminate dividends, offering a relatively stable source of passive income regardless of stock market conditions.
- Resilience: Because blue chips have a track record of resilience, even when the economy slows, shareholders feel confident that their investments will grow over time.
- Low volatility: With their stable prices, blue chip stocks don’t require the kind of close management that more volatile stocks do, making them a buy-and-hold investor favorite.
The risks of blue chip stocks
All investing involves risk, including the risk that you could lose money; blue chip stocks are not an exception. Despite the benefits they typically offer investors, even blue chip companies can fail. Sears, for example, was once the largest retailer in the world. It was listed in the Dow Jones Industrial Average for almost 75 years, but was removed from the index in 1999. The fortunes of the company declined during the 2000s, and it entered Chapter 11 bankruptcy in 2018; many Sears shareholders lost the money they invested in the company.
While a blue chip company’s utter failure may not be common, these stocks are still subject to price fluctuation. While the value of blue chip stocks tends to be stable, every company has ups and downs, and no one is immune to market forces. Just like any stocks, shares can lose value, and dividend payments can fall if the company’s profits do.
Another blue chip downside is relatively high share prices, which make these stocks less accessible to people who don’t have a lot of money to invest. For example, Nike’s share price was over $100 on June 17, 2022.
Finally, the very stability of blue chip stock prices can be seen as a downside to some investors. Slow and steady growth is a boon to a buy-and-hold investing strategy, which focuses on long-term growth. However, people who aim to earn a quick profit by trading their shares are less likely to benefit from investing in blue chips.
How to invest in blue chip stocks
You have a couple options for adding blue chip stocks to your portfolio: buying individual shares of stock or investing in a fund that includes them like Dow Jones Industrial Average. Each approach offers advantages and disadvantages.
Investing in blue-chip funds
Mutual funds and exchange-traded funds (ETF), which are baskets containing many securities like stocks, can include blue chips. Investors typically buy shares through a brokerage. For example, you could invest in a fund that tracks the Dow Jones Industrial Average or buy shares of a large-cap stock ETF that contains blue chips.
Funds provide a measure of diversification, a key risk-management strategy, because each fund contains the stock of many companies. Some mutual funds and ETFs also pay dividends, so fund-based investing can be a source of passive income.
Of course, any security can be affected by a falling economy, and some funds perform better than others. It’s wise to research any investment before buying, including historical performance, rules and limitations, and costs.
Investing in individual blue chip stocks
You can select companies to invest in and purchase their shares through a brokerage, a direct stock purchase program, or a dividend reinvestment program (DRIP). Buying individual stocks gives you total control over the components of your portfolio. And if you invest with a brokerage that offers fractional shares of blue chips stocks, it may be easier to get a piece of the pie even if you don’t have the cash to buy whole shares.
That said, it can also increase your risk. Even though blue-chip stocks are generally reliable performers, investing in one single stock puts all your eggs in one basket. Thus, if you buy individual stocks, you might want to take extra care to diversify the rest of your portfolio.
What are blue chip stocks’ roles in your portfolio?
Blue-chip stocks, while not without risk, are a usually solid choice for almost any investor looking for long-term growth. For more aggressive investors, they can provide some stability in a portfolio while maintaining the potential for higher long-term returns. For less aggressive investors, they offer the opportunity to invest in stocks with less risk of wildly fluctuating prices.
Interested in blue chip investing? With Stash, you can buy shares of blue chip ETFs and individual shares of blue chip companies. And with fractional shares, you can get started with any amount.
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