Blue chip is a nickname given to stocks of a well-established and trusted company. These are companies that investors rely on because of their credibility and reliability — industry leaders and household names. These large-cap stocks often have a market valuation of $10 billion or more.
While blue chip companies can be reliable, that also comes with slower growth. This feature makes them a conservative option for investors looking for a safe bet for an already established portfolio. You can also begin to establish your portfolio using these same assets, especially if you have enough money to invest in something that’s a bit more expensive. While you don’t want to overspend, you also want to hold onto assets that may be more appropriate for you.
Best Blue Chip Stocks
|JNJ||Johnson & Johnson||$154.77||1.74%||7M||Buy/Sell|
Key Characteristics of Blue Chip Stocks
Blue chip stocks can be identified by several shared traits. Not all blue chip stocks are the same, but they have underlying characteristics that make them easy to spot.
- Growth history: Blue chips have a solid history of sustained growth., which means good future prospects. They’re already established.
- Component of a market index: You’ll find these stocks in major market indexes, like the S&P 500 or the Nasdaq 100.
- Social relevance: Blue chip stocks tend to have a bit of social relevance that, while it cannot prevent them from failing, keeps these companies in the spotlight. As these companies remain relevant, they tend to retain their value more easily.
- Global presence: Blue chip stocks tend to perform better if they have a global presence and are relevant beyond North America.
- Higher dividend payouts: Dividends are regular payments made to investors from a company’s revenue. While there’s no requirement that a blue chip stock pays a dividend, it’s a common trait. Think Verizon’s 5% dividend. Small-cap stocks focus on expansion rather than dividends.
- Proper governance: Large companies are not invincible. They could begin to dip at any time, and it’s important to do your research and monitor how these stocks are performing.
- Diverse business channels: Blue chip stocks tend to be so diverse that they have several divisions or manage a range of products or services. A business can perform well with a small catalog, but a larger catalog allows more cash to flow.
- Government contracts: When you invest in consumer defensive stocks, you should look for government contracts that can sustain these companies for decades at a time.
- Long-term potential: Companies in the blue chip sector tend to be an integral part of American life, whether you see them or not. For example, defense contractors continue to have relationships with the military, giving them long-term potential.
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Should You Invest in Blue Chip Stocks?
Nike. Coca-Cola. Starbucks. Walmart. These are names you know well. But should you invest in them? One thing these big names have in common is cost efficiency, which can lead to strong earnings growth and distribution. These companies also remain in the public eye. Advertising never stops, and they’re often a part of our daily lives.
Stable and reliable, having a blue chip stock in your portfolio is not likely to be a bad thing. This stability points to strong financial footing, meaning no debt and a lot of efficiency. Blue chip stocks are often protected from severe volatility, making the risks limited. Although investing in a blue chip stock can bring steady, long-term returns — they are well regulated and have potential for regular dividends — there are some cautions to keep in mind.
You may not want to invest in certain types of blue chip stocks that might be in the midst of a downturn. For example, what if a blue chip business is about to be phased out of the market because its technology is derived from a bygone day? You need to be on the lookout for these things so that you can easily make wise choices.
Advantages of Investing in Blue Chip Stocks
- Hedged against massive volatility: The market might sway quite a bit, but blue chip stocks don’t tend to take the major downswings that you will see with other assets.
- Name recognition: When you invest in a blue chip stock, there’s a bit of name recognition that can help calm your nerves, especially if the asset is expensive. These investments are meant to last, and name recognition often helps these businesses survive even the toughest economic times because the public tends to turn to things they know.
- Long-term growth: Chances are, a blue chip stock will continue to grow for decades at a time, allowing pundits to say, ‘If you’d purchased [this blue chip stock] 30 years ago, here’s how much you’d have.”
- Strong dividend potential: Blue chip stocks are generally in a good position to generate dividends every quarter. While those dividends may change from one quarter to the next, they’re still paying you back for buying in.
- Future income potential: Aside from the idea of collecting dividends, some investors might look at blue chip stocks are opportunities to guarantee some level of future income. You can add extra money to your budget by holding blue chip stocks that continue to grow and pay dividends.
Drawbacks of Investing in Blue Chip Stocks
- Lag: Blue chip stocks can lag the market index, meaning they suffer from poor management practices and even scandals. They can also lose market share to smaller companies.
- Won’t beat the market: Because blue chip stocks are stable, they are not going to have skyrocketing prices or super-quick growth like smaller companies and start-ups might.
- Tricky for young investors: A lot of blue chip stocks pay dividends rather than investing in their own growth and increased stock value. For investors just starting out, you may want to find a stock that helps you build wealth, rather than a steady stock that won’t see much action.
- Expense: Blue chip stocks tend to be expensive, and that’s why many novice investors might need to build their net worth before investing in blue chip stocks.
- Changing sentiments: You may not lose all your money, but a blue chip stock that gets caught behind negative market sentiments may not gain the value you were anticipating.
The (Steady) Rise of Blue Chip Stocks
Blue chip stocks are the companies people tend to trust. The ones in your home. The drinks and food on your shelf, the hair products in your bathroom, the credit card in your wallet and the shows you watch. Blue chip stocks are reliable, which is why they’re so appealing to investors.
While blue chip stocks are slow to grow, they can be a trusted addition to a portfolio. That’s because these companies are predicted to have a bright future, whether through new products or inventions. Think Apple’s VR headset and Watch or Nike’s collaborations and new shoe technology. If you’re looking for dividend payouts and steady growth, blue chip stocks could be perfect for your portfolio.
Frequently Asked Questions
What is a blue chip stock?
A blue chip stock refers to shares of a well-established, financially stable and reputable company that has a long history of consistent earnings and dividend payments. These companies are typically leaders in their respective industries and have a strong market presence. Blue chip stocks are considered to be relatively safer investment options as they tend to be less volatile and have a track record of delivering steady returns over time.
Are blue chips good investments?
Blue chips are considered good investments because they are financially stable, have consistent growth and dividends and maintain a strong market presence. They are less risky than smaller companies and can withstand economic downturns. However, thorough research and analysis should be conducted before investing.
Where does the term blue chip come from?
The term blue chip originated from poker and was later used in finance to describe reliable and stable stocks or companies with a history of consistent performance. It has become synonymous with top-tier, well-established companies in the stock market.