What are blue chip stocks?

Blue chip stocks are shares of big, high-quality companies. These companies are well-known. They make a lot of money and have been around for a long time. People see them as stable investments. Blue chip companies are leaders in their industries. They have large market capitalizations, which means the total value of all their shares is very high – usually over $10 billion.

Why are they called “blue chips”?

The term “blue chip” comes from poker. In poker, the blue chips have the most value. So calling a stock “blue chip” means it’s one of the most valuable and reliable stocks. The term was first used to describe stocks in the 1920s by a man named Oliver Gingold. He worked at Dow Jones and noticed certain stocks trading at $200 or more per share. He started calling them “blue chip stocks”.

What makes a stock blue chip?

Blue chip companies share some key qualities:

• Large market capitalization over $10 billion
• Nationally recognized name and well-established business
• Leader in its industry
• Financially strong with many years of consistent revenue and earnings growth
• Pays steady or rising dividends to shareholders
• Stable business that can weather economic downturns

The most famous blue chip stocks are listed on major indexes like the Dow Jones Industrial Average, S&P 500, and the Nasdaq-100. But not all the stocks in these indexes are blue chips.

Examples of blue chip stocks

Some of the most well-known blue chip companies in the US are:

• Apple (AAPL)
• Microsoft (MSFT)
• Amazon (AMZN)
• Alphabet (Google) (GOOGL)
• Johnson & Johnson (JNJ)
• Procter & Gamble (PG)
• Coca-Cola (KO)
• ExxonMobil (XOM)
• Walmart (WMT)
• General Electric (GE)

These companies have existed for a long time. They make products or provide services that people use every day. They make billions of dollars in revenue and profits each year. Many have increased their dividend payouts to shareholders for decades. This list shows that blue chips can come from many different industries.

Advantages of investing in blue chip stocks

Lower Risk

The big advantage of blue chip stocks is they tend to be less risky than other stocks. Blue chip companies are unlikely to go bankrupt. Their businesses are stable and proven. They can survive difficult economic times that may really hurt smaller companies. This makes their stock prices less prone to major drops.

Consistent Dividends

Most blue chip stocks pay steady dividends. Some even increase their dividend every year. This provides a reliable income stream for investors. The dividends also help cushion any fall in the stock price during market downturns. Although the stock price may drop, you still collect dividends if the company keeps paying them.

Long-Term Growth Potential

Blue chips may not grow as fast as smaller, younger companies. But they still provide good potential for long-term growth. As industry leaders, they have strong competitive positions. This allows them to keep growing sales and profits over time. Patient investors can enjoy rising share prices and dividends.

Disadvantages of investing in blue chip stocks

Lower Potential Returns

The stability of blue chip stocks comes with a downside. They usually don’t have the same potential for massive returns as younger, faster-growing companies. Blue chips are so big already that it’s hard for them to double or triple in size like a small company might. Investors looking to get rich quick probably won’t choose blue chips.

Overvaluation Risk

Blue chips are popular stocks that many investors want to own. This high demand sometimes makes them overvalued. Investors may pay too high a price compared to the company’s actual financial value. If a blue chip becomes very overvalued, the stock price could fall a lot once investors realize it.

Slow Growth and Technology Disruption

Blue chip companies are sometimes slow to respond to industry changes. Smaller competitors may be more innovative and quicker to adapt. This is especially true with new technologies. For example, General Electric was slow to shift from traditional manufacturing to digital technology and renewable energy. This hurt the company’s growth and stock price.

How to invest in blue chip stocks

There are a few main ways to invest in blue chips:

1. Buy individual blue chip stocks through a broker
2. Invest in a blue chip mutual fund that pools money to buy many blue chip stocks
3. Invest in an exchange-traded fund (ETF) that tracks a blue chip index like the Dow Jones Industrial Average

Each approach has pros and cons. Buying individual stocks lets you choose the specific companies, but it takes more research and effort. Mutual funds and ETFs provide more diversification and are easier to invest in. But they charge fees that can eat into your returns.

The role of blue chip stocks in a portfolio

Financial advisors often recommend blue chip stocks as part of a balanced investment portfolio. They provide a strong foundation because of their stability. You can combine blue chips with other types of investments like:

• Faster-growing small company stocks for more potential growth
• Bonds for more steady income and lower risk
• International stocks and bonds for geographical diversification
• Real estate for diversification outside of the stock market

The right mix depends on your age, goals, and risk tolerance. But most advisors suggest owning at least some blue chip stocks. They can help you preserve and grow wealth over the long term.