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If you’re planning to invest in stock market, blue-chip stocks should represent your main focus point. Now, if you’re familiar with poker you already know what a blue-chip is. It’s the chip with the highest amount of value. In the stock market, blue-chip stocks are large companies, with a very good reputation. These are most valuable companies and, at the same time, the safest stocks you can add to your portfolio.
What are Blue-Chip Stocks
Blue-chip stocks are the stocks of well-established companies, financially stable companies with a proven track record.
These companies have been around for a very long time. These are not brand new companies or startups, these are companies that people have been investing in and putting their hard-earned money into for decades.
Blue-chip stocks have a track record that spreads over many decades as well. These companies are known for being very responsible with their money.
Blue-chip stocks are also companies that have been returning dividends and profits to shareholders for many years.
If you’re not familiar with what a dividend is, every single quarter these companies offer a portion of their profits in the form of a cash dividend to shareholders. So, four times a year they pay out a dividend.
Many people have a dividend reinvestment plan or dividend reinvestment program, where the dividends are automatically reinvested back into the blue-chip stock. Other investors just withdraw the dividend profit or reinvest it somewhere else.
Now, not only the blue-chip stocks pay dividends, they have a history of consistent dividends. This means that they’ve been paying them for many years or many decades in some cases.
Also, blue-chip stocks have a track record of rising dividends. So over time, the dividends yield is increasing or the amount they’re paying out in dividends is increasing.
Blue-chip stocks usually have a large market capitalization. In general, blue-chip stocks are usually companies with a market capitalization exceeding 10 billion dollars.
Blue-chip stocks are companies with dependable earnings. When you invest in blue-chip stocks you’re not going to see any earnings surprises in most cases. They are usually meeting expectations and just doing what is expected to do.
5 Reasons to Invest in Blue-chip Stocks
The Dividends Allow for Compound Interest
As we previously explained, most blue-chip companies are paying investors stable or increasing dividends. So, when you take those dividends and you reinvest it in the stock, then those dividends will allow you to earn more dividends in the future.
This is essentially compound interest at that point. In other words, you’re earning dividends on dividends, very similar to earning interest on interest.
Lower Risk
Being the most stable and solid stocks on the market, blue-chip stocks have a lower risk due to the track record.
So, because these are large companies that are well established, they’re dependable, they have a track record of success and a track record of dependable earnings. That’s why blue-chip stocks are considered as having a lower risk: because they are very well managed and they’re very well run.
You’re not going to see these companies typically as the ones that are going bankrupt. While it’s not impossible, it’s far less likely for a blue-chip stock to go bankrupt.
Historically, blue-chip stocks have been great long-term investments.
Less Volatility
Blue-chip profits are based on investors buying the stock and holding it for a large period of time. Most investors are long-term investors, so there’s a lot less volatility.
The volatility is the rate at which a stock moves. A volatile stock is one that records rapid fluctuations in price. A non-volatile or stable stock registers moderate price fluctuations. The most important role of the market volatility is to estimate the value of market risk. In other words, the volatility measures the market risk that an investor is willing to take when investing in a certain stock.
So if we record a market correction, usually the blue-chip stocks will hold their value more. That’s because fewer people are going to be selling out of fear. Usually, the people investing in blue-chip stocks are informed investors who know what they’re doing. They are investing in blue-chip stocks for the long term.
When investors buy a blue-chip stock they’re not going to hold that stock for two weeks and then take their profit. They’re probably investing in that stock for one year, or two or even more. And they understand things like market corrections and bear markets, and they’re not going to be the ones to sell out of panic.
That’s the reason why blue-chip stocks are less volatile and don’t correct as much as other stocks.
Hedging Against Losses
When you invest in a blue-chip you can profit from an increase in the share price, as well as from dividends. That is why serious investors prefer blue-chip stocks, because they are paid in two different ways.
But that’s not the only advantage. The other advantage is that it allows you to hedge against losses. So let’s say your blue-chip stock goes down in value but you actually had dividends that exceeded how much you lost. At that point, you’re able to hedge against losses.
For example, let’s assume that your blue-chip stock went down 3% in value but you made a 4% dividend yield. This means you’re actually up 1% on that investment because your dividends protected against that losses.
Safe-Haven during Turmoil
Whenever there is market uncertainty, many investors turn to blue-chip stocks because they’re known for being basically recession-proof.
Blue-chip stocks are considered safe-haven assets. A safe-haven asset protects investors during crises.
You must not confuse the term “safe-haven” with “hedging”. Hedging protects investors during normal times, but not necessarily during the turmoil. A safe-haven asset is expected to retain its value in times of market turbulence when most asset prices decline.
However, blue-chip stocks are not completely recession-proof. Let’s refer to them as recession-resistant. Blue-chip stocks are more resistant to bad economic conditions due to their track record, but they are by no means invincible.
Examples of Blue-Chip Stocks
While there is no official list of blue-chip stocks, many people use the Dow Jones Industrial Average to get a list of blue-chip stocks.
Dow Jones Industrial Average includes some of the industry leaders, stocks with a very large market capitalization. So, that’s the list we’re going to use in order to get some examples of blue-chip stocks.
| Company Name | Symbol | Industry |
| Boeing | BA | Aerospace and defense |
| Nike | NKE | Apparel |
| JPMorgan Chase | JPM | Banking |
| Goldman Sachs | GS | Banking, Financial services |
| Coca-Cola | KO | Beverages |
| Walt Disney | DIS | Broadcasting and entertainment |
| DowDuPont | DWDP | Chemical industry |
| Cisco Systems | CSCO | Computer networking |
| IBM | IBM | Computers and technology |
| 3M | MMM | Conglomerate |
| United Technologies | UTX | Conglomerate |
| Caterpillar | CAT | Construction and mining equipment |
| Visa | V | Consumer banking |
| Apple | AAPL | Consumer electronics |
| American Express | AXP | Consumer finance |
| Procter & Gamble | PG | Consumer goods |
| McDonald’s | MCD | Fast food |
| The Home Depot | HD | Home improvement retailer |
| Travelers | TRV | Insurance |
| UnitedHealth Group | UNH | Managed health care |
| Chevron | CVX | Oil & gas |
| ExxonMobil | XOM | Oil & gas |
| Johnson & Johnson | JNJ | Pharmaceuticals |
| Merck | MRK | Pharmaceuticals |
| Pfizer | PFE | Pharmaceuticals |
| Walgreens Boots Alliance | WBA | Pharmaceuticals |
| Walmart | WMT | Retail |
| Intel | INTC | Semiconductors |
| Microsoft | MSFT | Software |
| Verizon | VZ | Telecommunication |
These 30 companies have a large market capitalization, of billions of USD, and are among the market leaders in their sector. They are the most stable and solid stocks on the market.
Blue-Chip Stocks Disadvantages
High Price
Blue-chip stocks tend to be more expensive than other shares. This will automatically create a disadvantage for a new investor who wants to diversify his portfolio among various share classes. For this reason, he needs to pay a higher price for a blue-chip stock.
Slow Growth and Lower Returns
Blue-chip stocks are consistent and deliver earnings increases in the long run, but their growth is small and steady. If you are a patient investor and enjoy accumulating value in the long-term, blue-chip stocks will suit you.
However, there are investors who expect higher returns in a short period of time. So, if you have a high level of risk tolerance and are more aggressive in your investment approaches, maybe you should analyze other types of stocks.
Low Volatility
For an investor with a high-risk aversion, a non-volatile stock like blue-chips isn’t considered an attractive opportunity. An aggressive investor knows the fact that blue-chip stocks won’t bring explosive profits in a short time, even if the market timing was done correctly.
For this reason, blue-chip stocks are considered boring and predictable by some investors.
How to Invest in Blue-Chip Stocks
Research
Before buying blindly a blue-chip stock just because you heard it on news that the market is rising, you should make your own research on the best-performing companies.
- Start evaluating the recent annual and quarterly reports, in order to understand their performance.
- Analyze the blue-chip stock’s financial performance in the last years
- Analyze the dividend payments trend and the trend of the company’s reported earnings.
- Look at the historical performance over a long period of time to see the blue-chip stock’s performance during bull and bear markets
- Look at the corrections recorded during bear markets and compare them to other stocks. Find the companies that hold their value the most, or stocks that recover quickly their market losses.
Think Long-Term
Investments in blue-chips are not made for the short-term. You must look at the bigger picture when you put your money into these companies. So, you have to ask yourself several questions regarding the future evolution of the blue-chip stock you are investing in:
- Is the company pursuing growth and new business development?
- Is the company planning to expand into new countries?
- What will be the company’s market share in the future?
- What are the main competitors that could affect the blue-chip stock’s market share?
- What will happen if the current strong management team will leave? Will this change have an important impact on the company’s business?
These are valid questions you should look into. Nobody can predict the future, we all know that, but we should try at least to estimate how the company will look in 5 years, or 10 years.
Market Timing
When you finally decided on most attractive stocks, you have to time you enter on the market. The market has a directional character, meaning that it follows a trend. As we are investing in the long term, we need to find a good entry point.
You don’t want to buy a blue-chip stock at a high price, right at the beginning of a correction. So, you need to apply some basic technical analysis, in order to determine an optimal entry point. Technical analysis represents a method to study price evolution through charts with the purpose of determining its future direction.
As we already know the direction we want to follow. We already know that a primary trend of a blue-chip stock is upwards, so we need to enter the market at the end of a secondary trend.
Try to analyze chart patterns and add some technical indicators on charts.
Patterns identified in the past that have proven to be valid at one time could also work in future and will help you to anticipate future developments.
If you time your market entry point right, you could potentially add higher profits to your account.
Diversification
Many beginners consider that investing in a portfolio of blue-chip stocks is a smart move that will offer them high returns. However, the key to any investment portfolio is diversification. If you’re planning to invest in blue-chip stocks you must diversify your portfolio across many different sectors.
So I wouldn’t take all of my money and invest all in oil & gas blue-chip stocks, for example. It’s wiser to construct a well-diversified portfolio with blue-chips of different industries.
