What are Blue Chip Stocks? Examples and Characteristics

The term blue chip stock originates from the card game poker, where different colors of chips are used to represent different dollar amounts. In the game of poker, the blue-chip surpasses the red and white chips and is usually the one with the highest value of all. In 1923, the blue-chip concept was first used to describe high values stocks, when Oliver Gingold (an employee at Dow Jones) observed certain stocks were trading at $200 and above. He referred to these stocks as blue chip stocks. Since then, the term has been used to describe quality stocks with high prices.

Blue chip stocks have a market capitalization of billions and are among the most popular stocks to be bought among investors. These companies are well-known, well-capitalized, and have solid financial prospects. These types of stocks can be found in top stock indices such as the S&P 500, DJIA (Dow Jones Industrial Average), and NASDAQ. Typical examples of blue chip companies include Coca-cola Co., IBM Corp, Apple inc., Boeing Co etc.

Blue chip investment

Blue chip investment entails investing in companies with large market capitalization and an excellent reputation. These stocks are quite the opposite of penny stocks which do not pay dividends and tend to have a lower and less stable price.

Blue chip stocks are usually called rock-solid securities because during a recession, inflation, depression, and other economic downturns, they exhibit stable performance. Blue chip investments are considered to be less risky compared to mid-cap and small-cap stocks. They can offer a lower-risk and less volatile investment opportunity and are usually considered safe as a result of their leadership status within their industries.

A blue chip company has impressive balance sheets, business models, cash flow, and growth rate that make them attractive to lots of investors. Blue chip investment is ideal for long-term investors that have a low-risk appetite. These stocks tend to grow steadily and offer high dividends. There are a lot of high dividend blue chip stocks that are sought after in the market.

How to invest in blue chip stocks

Investing in blue chip stocks is a safe option for many investors. These investors can depend on these stocks during times of economic uncertainty. Investing in blue chip stocks can involve buying and selling the stocks outright at a spot price or with forward contract. This forward contract is an agreement between two parties (buyer and seller) to exchange an asset at a specified price on a future date.

Also, how to invest in blue chip stocks can involve a method of investment known as derivative trading. This investment method is best suited for short-term traders. Derivative trading is an investment method whereby traders speculate on the future price action of an asset through buying and selling derivative contracts. The aim of this is to achieve enhanced gains compared to when the underlying asset is bought outrightly.

Furthermore, blue chip stocks are appropriate for use as a core holding within a larger portfolio. However, they shouldn’t be the entire portfolio. They can be included in the investment portfolio to mitigate risks since bluechip stocks are companies that are already established. Returns are guaranteed with blue chip stocks, though they are lower than the other high-performance stocks because the room for further growth in such companies is limited.

In order words, an ideal investment portfolio should include owning cash, bonds, and blue chip stocks as well as small-caps and mid-caps. Blue chip investments tend to be a safe option for risk mitigation and stability because they can survive tough market cycles. Nevertheless, this may not always be the case as there are still instances of blue chip companies struggling during periods of extreme stress. For example, during the global recession of 2008, blue chip companies like General Motors and Lehman Brothers faced severe challenges.

In conclusion, a diversified portfolio should include owning a rash of blue chip stocks, among a variety of other holdings. Investors can also seek to get blue-chip exposure via the purchase of exchange-traded funds (ETFs) or mutual funds. They can be assisted by investment advisors to select the right blue chip company. Therefore, when considering investing in blue chip stocks, it is advisable to thoroughly review the fundamentals of the company such as profitability, revenue, assets, liabilities, and growth potential. This will help to evaluate all elements that may affect one’s investment decision.

How to buy blue chip stocks

How to buy blue chip stocks would involve the market participant purchasing exchange-traded funds (ETFs) or mutual funds that invest in blue-chip stocks. Also, market participants can buy blue chip stocks individually.

Funds and ETFs, in some cases, will hold a variety of stocks and asset classes, including blue chips. Whereas, in other cases, the EFTs or funds may focus exclusively on blue chips. A typical example is an ETF that tracks the DJIA (Dow Jones Industrial Average) which has 30 of the largest top blue chip stocks.

Investors that are looking out to invest in blue chip companies should review the fundamentals of companies before making an investment decision. There are characteristics that are common among blue chip companies that can be easily observed.

Characteristics of blue chip stocks

1. They are large-cap stocks
2. These stocks have a low risk
3. Blue chip companies have stable growth
4. Long term perspective
5. Most blue chip stocks pay a dividend
6. Component of a market index

They are large-cap stocks

One of the characteristics of blue chip stocks is that they have large market capitalization. The market capitalization of a company is the total value of all the company’s shares. Blue chip stocks are categorized as large-cap stocks because they belong to companies with a large market capitalization (market cap). These stocks have a large cap, meaning that they have a market valuation of $10 billion and above.

These stocks have a low risk

One of the major characteristics of blue chip stocks is that they are low-risk investments. These stocks are usually considered safe investments. This is because the issuing blue chip companies are financially stable and are capable of clearing debts and liabilities.

Blue chip companies have stable growth

The companies that issue out blue chip stocks have a reliable and solid reputation for sustained growth. They are already established and have good future prospects. They are mostly already at the peak of their growth prospects.

Long term perspective

Blue chip investments are ideal for long-term investors that have a low-risk appetite. This is because, only when blue chip stocks are held long-term, do they provide the desired results.

Most blue-chip stocks pay a dividend

Not all blue-chip stocks pay dividends but the majority of them do. Dividends are the regular payment made to equity holders from the revenue that the company generates. Blue chip stocks with dividends are usually companies that are mature and no longer need to invest as much revenue back into their growth.

Even though dividend payments are not mandatory for a stock to be considered a blue chip, the majority of blue chip companies are known for paying stable and rising dividends. They usually offer dividend payouts to their stakeholders.

Component of a market index

Blue chips are a component of the most reputable market index. Blue chip stocks are traded on the major market indexes or averages such as the Standard & Poor’s (S&P) 500, the TSX-60 in Canada, the Dow Jones Industrial Average, the FTSE Index in the United Kingdom, the NYSE index in New York or the Nasdaq-100 in the United States.

Blue chip stocks examples

Examples of blue chip stocks include large companies with strong brands, businesses that are financially sound, and consistent cash flows and earnings. The majority of companies that fall under examples of blue chip stocks often pay sizable dividends and are typically leaders within their given market sectors. They are known to have successfully navigated economic downturns in the past. The majority of the largest companies in the S&P 500 or the Dow 30, such as Walt Disney Co, IBM, Walmart, Mastercard, Apple, etc. are such blue chip stock examples.

List of blue chip stocks examples

1. Apple Inc. (AAPL)
2. UnitedHealth Group Inc. (UNH)
3. Visa Inc. (V)
4. Mastercard Inc. (MA)
5. Home Depot Inc. (HD)
6. Thermo Fisher Scientific Inc. (TMO)
7. Comcast Corp. (CMCSA)
8. Accenture PLC (ACN)
9. McDonald’s Corp. (MCD)
10. Walt Disney Co. (DIS)

US News listed the blue-chip companies mentioned above as 10 of the best blue-chip stocks to buy in 2022. These top blue chip stocks listed, are blue chips to buy as recommended by CFRA analysts. This list of blue-chip stock examples has S&P Global Market Intelligence quality ratings of A or A+.

The table below shows a list of blue chip stocks examples with some of their fundamentals such as market capitalization, the price-to-earnings ratio (P/E), dividend yield, net Income, revenue, and diluted earnings per share (EPS), etc.

Pros of investing in blue chip stocks

The major advantage of blue chip stocks is that they are viewed as low-risk investments. This is because they tend to often have steady earnings and pay dividends to investors. These stocks are trusted by investors partly because of their large market capitalization. They are good for investors that want to see steady gains in their portfolio.

Blue chip stocks are more stable compared to smaller and newer companies that may struggle to cope with market changes and recessions. Investing in blue chips is advantageous because these companies are usually able to survive during the market cycles and continue to deliver returns.

One major pro of blue chip investment is the dividend payout that investors get. Blue chip companies usually pay dividends to shareholders. This steady and reliable income makes a blue chip company appealing to retirees and income investors. Also, investors can use a dividend reinvestment plan (DRIP) to automatically turn the earnings they get into more shares of the blue-chip stock. Hence, allowing compounding returns to grow even faster.

Blue chip stocks are not as volatile as other securities. Hence, they don’t need so much management, oversight, or worry. Hence, they can be extremely useful for a passive investor who just wants to set it and forget it.

Cons of investing in blue chip stocks

The cons of blue chips are that in as much as they are market leaders in their industry, they are not immune to crashes or bankruptcy. Sadly, such occurrences tend to make it to the headlines. These stocks are primarily owned by the investing public, thus, bad news in the market can cause substantial damage to the share price of these companies.

Another disadvantage of blue chips is that they can be costly. These companies are well established and as a result, their share prices tend to be higher than stock types such as growth stocks, value stocks, and penny stocks (smaller or newer stocks).

Furthermore, chances of experiencing exponential growth over the short term are low in blue chip companies. This is because these companies have been in business for a long time and command high share prices. Therefore, what one gets are just steady and less exciting returns built over decades.

FAQs on blue-chip stocks