What Does “Blue Chip” Mean?
At poker tables, blue poker chips are traditionally worth the most, followed by red and white chips. For instance, blue chips might be worth $20 each with red chips worth $5 and white chips worth $1.
Outside of casinos, “blue-chip” has become a descriptor used to denote things that are of the highest value or quality within a particular category. In the investing world, the term is often used to describe particular companies or stocks.
What Are Blue-Chip Stocks?
Blue-chip stocks and companies are those that are well-established, have a long and consistent track record of growth and earnings, and have a high market capitalization (i.e., are worth a lot of money according to the market). In simpler terms, a blue-chip is a large, respected, well-known, and successful company that has been around for a long time. These companies are massive, financially healthy, and have a history of solid earnings. Many blue-chip companies also pay dividends to their investors.
When you think of “classic” or “major” American companies, many of those that come to mind are probably blue chips. JP Morgan Chase, Coca-Cola, Walt Disney, Pfizer, and General Motors are just a few examples. The Dow Jones Industrial Average (DJIA), a popular stock index, comprises 30 major blue-chip stocks but does not include every stock that falls into that category.
Characteristics of Blue-Chip Companies
Most blue-chip companies . . .
- have a high market capitalization (usually in the tens or hundreds of billions).
- are included in one or more major stock indexes like the S&P 500 or the DJIA.
- have been around for a long time (decades).
- have a track record of resistance to economic recessions.
- have low volatility and consistent growth.
- don’t have an unreasonable amount of debt.
- are well-known household names.
15 Examples of Blue-Chip Companies
Advantages of Investing in Blue-Chip Stocks
Many investors choose to include blue-chip stocks (or an ETF consisting of blue-chip stocks) in their portfolios because of the benefits they provide. Below are some of the main advantages that come with incorporating blue-chip stocks into a diversified portfolio.
Low Risk
Blue-chip companies are creditworthy, meaning they have a long history of paying their debts and plenty of capital with which to meet their current financial obligations. For this reason, it is extremely unlikely that they will go bankrupt. This makes their stock far less risky to hold than the stock of newer companies that have debt, short credit histories, and less capital.
Relatively Reliable Returns
Blue-chip companies have been around (and been successful) for a long time, so they tend to generate relatively consistent returns over the long term. During periods of economic instability, blue-chip companies typically outperform others, so many investors treat them as relatively safe and stable investments.
Low Volatility
The stocks of newer companies that are in growth phases and are still expanding their operations tend to be highly volatile in price compared to the stocks of mature, well-established companies whose business models, revenue streams, and brand identities have been stable for some time. Blue-chip companies fall into the latter category, so they are a good choice for investors who prefer stability to volatility.
Dividend Payments
Because most blue-chip companies are profitable and have been for a long time, many of them reward their investors with dividends. Dividends are periodic payments companies send to their investors based on their profits. Dividends are typically paid monthly, quarterly, biannually, or annually.
Disadvantages of Investing in Blue-Chip Stocks
While blue-chip stocks provide many benefits to those who invest in them, they also come with a few disadvantages for certain investors.
Modest Returns
Because blue-chip stocks have been around for a long time, so they tend to be successful but relatively stable. This means that investors can usually expect consistent but modest returns (and maybe some dividend payments) if they hold for a long period of time. For investors seeking more substantial returns in the shorter term, however, blue-chips may not be as appealing.
Slow Growth
Because blue-chip companies are mature, they’re unlikely to experience the sort of rapid growth that could lead to large returns over a relatively short period. If you want slow, steady, modest returns, blue-chip stocks are great, but investors looking to “get in early” before a stock “goes to the moon” would have better luck (along with much higher risk) investing in relatively newer companies that are still in major growth phases.
Low Volatility
While low volatility is a plus for passive investors who want consistent, moderate returns over the long term, this stability is not as appealing to short-term traders who aim to make money by capitalizing on rapid shifts in price over the short term.
Higher Relative Price
Because blue chips are so well known and appeal to so many different types of investors (e.g., dividend seekers, retirement investors, retail investors, institutional investors, etc.), there is a lot of demand for them, so their market prices can be relatively high compared to their supposed intrinsic value.
How to Invest in Blue-Chip Stocks
Blue-chip stocks can make a great addition to a diversified portfolio. Because of their stable nature, they are a particularly attractive choice for long-term investors and dividend investors. All blue-chip stocks are publicly traded, so it’s easy to buy shares on popular trading apps and websites like Fidelity, Charles Schwab, SoFi, and Robinhood. Some platforms even allow users to trade fractional shares, which makes it easier to buy stock in blue-chip companies with high share prices.
Active investors may want to take the time to research a number of blue-chip companies before investing in those they believe are the most undervalued based on their fundamentals. It may also be prudent to invest in blue chips across multiple industries (e.g., pharmaceuticals, banking technology, energy, and retail) for diversification in case a particular industry takes a hit due to unforeseen circumstances.
More passive investors might prefer to gain exposure to many blue-chip stocks at once without needing to conduct too much research by purchasing shares of one or more blue-chip-themed ETFs or mutual funds. Popular blue-chip-focused ETFs include SPY, which tracks the S&P 500 stock market index, and NOBL, which is a collection of 50 blue-chip stocks whose dividend payments have increased over time.
5 Blue-Chip Stocks That Are Known for High Dividend Yield
- AT&T (NYSE: T)
- Dominion Energy (NYSE: D)
- Bank of Nova Scotia (NYSE: BNS)
- General Mills (NYSE: GIS)
- Royal Dutch Shell (NYSE: RDS.A)
Frequently Asked Questions (FAQ)
Below are answers to some of the most common questions investors have about blue-chip stocks.
Are Blue-Chip Stocks Less Risky Than Other Stocks?
In general, blue-chip stocks are considered less risky than others because the companies they represent are mature, financially healthy, and have a long track record of positive earnings. Like all stocks, blue chips go up and down in value, but over the long term, they typically generate modest returns rather than losses.
Are Blue-Chip Stocks Good for Passive Investors?
Because of their stability, blue chips are less susceptible than some other stocks to economic changes, industry news, and other events that can trigger volatility. For this reason, they may be good investments for those who wish to see their money grow slowly without watching the market or making frequent trades.
Do Blue Chip Stocks Pay Dividends?
Blue-chip stocks do not have to pay dividends by definition, but many do. Because most blue-chip companies are no longer in active growth phases, many choose to distribute some of their profits to investors in the form of dividends rather than reinvesting all of their earnings in growth, expansion, and product development.
