What Is a Blue Chip?
A blue chip is a nationally or internationally recognized, well-established, and financially sound company that is publicly traded. Blue chips generally sell high-quality, widely accepted products and services.
Blue chip companies have reputable brands that have been built and maintained over many years. That and the fact that they have weathered multiple downturns in the economy make them stable companies to have in a portfolio.
Blue chip companies operate profitably despite adverse economic conditions, which helps to contribute to their long records of stable and reliable growth.
Key Takeaways
- A blue chip stock refers to the shares of an established, profitable, and well-recognized corporation.
- Blue chips are characterized by a large market capitalization, a listing on a major stock exchange, and a history of reliable growth and dividend payments.
- Blue chip stocks are seen as relatively safe investments, with a proven track record of success and stable growth.
- Although blue chips are reliably stable, they are unlikely to generate the same high returns as potentially riskier investments.
- Despite their stability, blue chip stocks can experience volatility and failure, as did some during the 2007-2008 financial crisis.
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Understanding Blue Chips
The term "blue chip" was first used in 1923 by Oliver Gingold, an employee of Dow Jones, to describe stocks that traded at $200 or more per share. It relates to poker chips of blue, white, and red, with the blue chips having the greatest value.
Today, blue chip stocks aren't necessarily stocks with a high price tag. More accurately, they are shares of high-quality companies in healthy financial condition that have withstood the tests of time.
A blue chip stock is generally a component of the most reputable market indexes or averages, such as theDow Jones Industrial Average, the Standard & Poor's (S&P) 500 and the Nasdaq-100 in the United States, the TSX-60 in Canada, and theFTSEIndex in the United Kingdom. They are usually listed on major stock exchanges, such as the NYSE and the Nasdaq.
How big a company needs to be to qualify for blue chip status is open to debate. A generally accepted benchmark is a market capitalization of $10 billion, although market or sector leaders can be companies of all sizes.
Many conservative investors with low risk profiles or nearing retirement may prefer blue chip stocks. They can offer capital preservation and consistent dividend payments for income and protection against inflation.
In his book The Intelligent Investor, Benjamin Graham suggests that conservative investors look for companies that have paid dividends consistently for 20 years or more.
The Dividend Aristocrat stock list published by Standard and Poor’s comprises large-cap blue chip companies in the S&P 500 that have increased dividends every year for the last 25 years.
Examples of Blue Chip Stocks
A blue chip company can be a multinational firm that has operated successfully for a number of years, is a dominant leader in its industry, and is widely recognized.
Some examples include:
- Coca-Cola
- Berkshire Hathaway
- Amgen
- UnitedHealth Group
- PepsiCo
- Nike
- Proctor & Gamble
- Chevron
- Walmart
- IBM
- McDonald’s
- Caterpillar
The name "blue chip" comes from the game of poker in which the blue chips have the highest value.
Characteristics of Blue Chip Stocks
- Blue chip stocks are seen as less volatile investments than shares in companies without blue chip status because of their noteworthy institutional profile and longstanding financial health.
- Blue chips are highly liquid since they are frequently traded in the market by individual and institutional investors alike. Therefore, investors who need cash can feel confident that there will be buyers for their shares.
- Blue chip companies are also characterized as having little to no debt, large market capitalization, stable debt-to-equity ratio, and high return on equity (ROE) and return on assets (ROA).
- Solid balance sheet fundamentals and high liquidity have earned blue chip stocks the investment-grade credit rating.
- Whiledividendpayments are not necessary for a stock to be considered a blue chip, most blue chips have long records of paying stable or rising dividends.
- An investor can track the performance of blue chip stocks through a blue chip index, which can also be seen as an indicator of industry or economic performance.
Blue Chips As Safe Investments
Over the years, a blue chip company will have survived financial challenges anddifficult market cycles. It will have turned in a steady return and typically paid dividends year in and year out. As a result, it can be perceived as a safe investment.
However, this doesn't make it bulletproof. Thebankruptciesof General Motors andLehman Brothers, as well as a number of leading European banks, during theglobal recessionof 2007-2009 show that even the best companies may struggle during periods of extreme stress.
Blue chip stocks can be appropriate for the core holdings of a large portfolio. But they shouldn't be the only investments. A diversified portfolio usually has some allocation of bonds and cash, in addition to stocks. Moreover, a portfolio's allocation to stocks can be diversified among large-caps, mid-caps and small-caps, as well as domestic and international stocks.
Younger investors can generally tolerate the risk of having a larger percentage of their portfolios in growth stocks (which include some blue chips) because they have years to invest and recover from market mishaps. Older investors may choose to focus more on capital preservation by putting a larger percentage of their investments in bonds and cash.
Advantages and Disadvantages of Blue Chip Stocks
Advantages
Low Risk: As industry leaders with reliable cash flows and long histories of paying their debts, blue chip companies are considered to be low risk. They are unlikely to suffer from a sudden credit or liquidity crunch.
Reliable Return: Blue chip companies typically provide reliable growth potential as well as consistent dividend payments.
Low Volatility: Due to their well-tested business models, established operations, dependable revenue, and long-lived brands, blue chips are seen as stable companies/stocks.
Less Effort: The dependability and lower volatility that they offer can mean less need for concern and monitoring.
Disadvantages
Lower Returns: While returns can be reliable, well-established, mature companies such as blue chips offer more modest returns than, for instance, smaller startups that have room for greater and more rapid growth.
More Expensive: Because of their lower risk, reliable return potential, and lower volatility, blue chips tend to be in greater demand and, thus, more expensive than stocks of other companies of comparable size.
Pros and Cons of Blue Chip Stocks
Pros
Lower risk than other stocks.
Lower volatility.
Reliable returns and dividends.
Cons
Lower returns than less established companies.
Less room to grow, meaning that they are unlikely to see large gains.
Expensive due to high demand.
How to Buy Blue Chip Stocks
Investors can buy individual blue chip stocks through a broker. They can also invest in blue chips by buying a fund that targets large-cap companies or market leaders. Many of these companies may be considered blue chips, but investors may also gain useful exposure to other companies.
Investors can also buy mutual funds and ETFs that specifically target blue chip companies, giving them exposure to an entire basket of blue chip stocks with a single investment. Most asset managers, including Fidelity and BlackRock, offer one or more blue chip-focused funds.
What Are Some Blue Chip Stocks?
Common examples of blue chip stocks are market leaders like IBM, Coca-Cola, and McDonald's. These are companies with a long track record of steady growth and low volatility, suggesting that they are unlikely to face major problems in the near future. Blue chips are characterized by a high credit rating, large market capitalization, a listing on the NYSE or another major stock exchange, and are often listed in a major stock market index.
What Is a Blue Chip NFT?
A "blue chip NFT" is a digital artwork or collectible issued by one of the more reputable players in the market for non-fungible tokens. Because these companies are relatively well-established in the NFT space, they are considered less risky than some of their upstart competitors. However, because digital assets represent a new and risky market, it may be a stretch to apply the blue chip label to such a speculative asset.
How Do You Invest in Blue Chip Stocks?
You can invest in blue chip stocks through a stock brokerage such as Fidelity or Charles Schwab. Simply search for the company's ticker symbol in the broker's stock screener. In addition, many asset managers also run mutual funds or index funds that specifically target blue chip securities, making it easy to invest in a basket of such companies.
Where Do Blue Chip Stocks Get Their Name?
The term "blue chip" comes from the game of poker, where blue chips are usually the most valuable ones on the table. It was first used by Oliver Gingold, an employee at Dow Jones, who observed that certain stocks reliably traded above $200 per share. Nowadays, some blue chips trade in the thousands per share.
The Bottom Line
"Blue chip" is an informal term for the most reliable and valuable companies on the market. These are usually companies with a long track record of financial stability. They are usually leaders within their industry. For that reason, they are often sought after and considered low-risk investments.
