What Are Blue Chip Stocks?

Are you just starting your investment journey and wondering what are blue chip stocks?

Right off the bat, these are the stocks of the most reputable publicly-traded companies. Those that have been around for a while, have a strong financial track record, and a great success rate throughout their existence.

In most countries and industries, blue chip companies are the household name. Some examples of businesses falling under this prime category are Microsoft, Apple, and Coca-Cola.

Is it a good idea to invest in them? Let’s discuss the benefits and look at more specific examples!

What Are Blue Chip Stocks?

To get classified as a blue chip stock company, a business needs to achieve more than just a positive reputation. It also needs to stand the test of time. From an investor’s perspective, the decision where to put your money is mostly about the potential risks. Companies that have successfully endured tough market conditions and posted robust returns during good times are the ones that provide the greatest reliability.

There are four characteristics that the majority of blue chip companies share:

• Large market capitalization
• Growth history
• Component of a market index
• Dividends

Disclaimer: Not all blue chip stocks pay dividends. This is more of a common practice than an active rule.

Etymology

The origin of the “blue chip” name stems back to 1923 and comes from the comparison to the most valuable blue poker chips. Initially, the term was used for high-value stocks, but today, the meaning is slightly different.

A company’s value on the stock exchange can skyrocket overnight, but that doesn’t make it a blue chip. Instead, the list of blue chip stocks is based on quality and longevity rather than just value.

For instance, Tesla has a stellar track record for a while now. But according to the S&P 500 index, the electric vehicle company only became a blue chip in 2020. In other words, the best-performing stocks are not necessarily blue chips.

Total Value of the Company

One more factor worth discussing is the market value needed for a company to be classified as a blue chip. The truth is that there’s no established rule. It’s common to believe that the market capitalization of $5 billion is enough to get a company onto the blue chip stocks list. But according to other criteria and interpretations, the median market cap should historically be close to $100 billion.

What Are the Benefits of Investing in Blue Chip Stocks?

Investing in blue chip stocks is considered a low-risk, long-term investment. Here are several reasons why this concept is quite unique on the stock market and why it’s definitely worth your while.

Assured returns

Even though there’s no such thing as 100% guaranteed returns (anywhere in the business world), it’s really hard to imagine losing money on Coca-Cola stocks, right? The blue chip dividend stocks also ensure that you get rewarded regularly. These dividends are quarterly, which means that investors get steady returns even on their long-term stock investments.

Portfolio diversification

Keeping all your eggs in one basket is a bad idea. Blue chip investments can help diversify your portfolio. Depending on your goals, you will have to invest a certain portion of your funds into a low-risk venue. Some people prefer to invest 10-20% of their total assets in precious metals. The concept of blue chip investing fills a similar niche.

Liquidity

One of the winning features of blue chip stocks is their creditworthiness. The fact that they’re attractive even to conservative investors ensures that they’re constantly in demand and always easy to sell.

Disclaimer: While it’s highly unlikely for top blue chip stocks to lose value, this has happened in the past. During the 2008 recession, large companies including General Motors and Lehman Brothers went bankrupt. So, although rare and far-fetched, you should be aware that these scenarios are possible.

Blue Chip Stocks vs Blue Chip Funds

The biggest problem with investing in blue chip stocks is that they are quite expensive. The high price locks out a lot of potential investors who want to invest in these stocks but don’t have enough money to do so independently. This is where blue chip funds come in.

Mutual funds allow you to pool your money together with other investors to purchase a collection of stocks that might be difficult to buy on your own. Apart from affordability, the question of blue chip stocks vs blue chip funds is whether you want to invest independently or in a professionally-managed portfolio.

Just keep in mind that choosing the right blue chip fund may be as hard as picking the right blue chip investments. You could benefit from research or even a stock screening tool.

It’s also of note that many mutual funds use “blue chip” as a synonym for large cap funds or preceding the word “emerging”. Therefore, having the name blue chip doesn’t necessarily mean that those funds invest entirely in blue chip companies.

Recognizing future blue chip growth is not a simple thing either. All of these companies seem solid, and without much experience in the field of a stock exchange, it might be hard to make an accurate projection. Experts behind blue chip funds possess vast knowledge and experience in this field. Some of them are experts with previous experience of working in a brokerage firm.

What Are Some Examples of Blue Chip Stocks?

The simplest way to further explain the concept of blue chip stocks is to present some examples. You can find some of these top-notch companies on stock market indexes like Dow Jones Industrial Average.

Microsoft

Microsoft is the world’s second-largest publicly traded company (right after Apple). This makes it an ideal representative of the blue-chip categoryThe tech giant’s total market value is approximately $1.8 trillion dollars. While reliable, the dividend yield is at 1%. Since this is lower than 2%-6%, which is taken as above-average (by the industry standards), Microsoft isn’t among the high dividend blue chip stocks.

You may also be interested in How to buy Microsoft stock

Amazon.com

Amazon’s market value is around $1.5 trillion. Most analysts see the online retailer as a strong buy. Also, while some believe that there’s such a thing as “too late to invest in order to get rich”, this is definitely not the case with this company. After all, Warren Buffet became an Amazon shareholder as late as 2019. This alone goes to show that blue chip investing in Amazon.com is still a good idea.

You may also be interested in How to Buy Amazon Stock

Facebook

The market value of Facebook is $745 billion, and the company is going stronger every day. While some had fears that competitors had the potential of dethroning Facebook, this social media conglomerate proved them all wrong by acquiring most of its competition. Moreover, while most other industries suffered due to the financial impact of the COVID-19 pandemic, social networks even saw growth during this period.

You may also be interested in How to Buy Facebook Stock

Apple

People who tried finding out what are blue chip stocks on their own probably encountered Apple pretty soon in their search. The chances are that this company was the example used. Apple’s market value is estimated at $2 trillion, which is hardly surprising, knowing this is the world’s largest publicly-traded company. Most analysts describe the company’s stocks as either strong buy, buy, or hold. Yet, Apple’s dividend yield is somewhat lower at 0.7%.

You may also be interested in How To Buy Apple Stock

Alphabet

Alphabet is the parent company of Google, and its value is estimated at $1.4 trillion. Therefore, it’s no surprise that its stocks are so highly positioned on every blue chip stock companies list. One concern that some analysts may have regarding the value of Alphabet’s shares is the future of advertising. For Google, advertising is the single greatest source of revenue. According to expert projections, this industry might greatly suffer during the COVID-19 pandemic.

You may also be interested in How to buy Google stock

Visa

Visa’s market value stands at $471.1 billion. The dividend yield is at a fairly low 0.6%, but the stock is still rated a strong buy. We are quickly transitioning towards a cashless world, which implies that Visa will likely remain highly positioned on the blue chips companies list for the years to come. The only downside is the global travel restriction, which has somewhat diminished average transaction volumes.

Walt Disney

The Walt Disney Company is the world’s biggest entertainment conglomerate. Its value is estimated at $364 billion. The company’s consumer-centric attitude and the expansion of its Disney+ platform suggest future growth. The fact that Disney is also in possession of most big studios and streaming platforms like ESPN+ and Hulu further guarantees a great rating on every blue chip index.

You may also be interested in How to buy Disney stock

JPMorgan Chase

The market value of JPMorgan Chase is $262.1 billion, and this company has one of the highest dividends yields of all top ten blue chip stocks — 2.4%. Since anything between 2%-6% is considered great, those with interest in turning their stock market investments into a source of regular income should seriously consider this blue chip stock.

Key Takeaways

The blue chip stock definition is relatively easy to give. These are the shares of some of the biggest, most renowned, most valuable companies in the world. These top-notch stocks have the lowest investment risk but also a relatively low yield.

Seeing how most blue chip stocks pay a dividend, such an investment can become a passive stream of income. Still, these stocks are incredibly expensive, which is why some investors choose to go through blue chip funds rather than make an independent stock investment.