A blue-chip stock is a nickname given to the common stock of large companies with a track record of growth. These stocks tend to cost more. But, they're popular choices because of their stability and slow, steady growth.
Their steady growth makes them good choices if you're investing for the long term. Learn more about why you might want to add these stocks to your portfolio.
What Are Blue-Chip Stocks?
The term "blue-chip stock" comes from poker, where the most valuable playing chip color is blue. There are many ideas about what, precisely, makes up a blue-chip stock. But, generally speaking, blue-chip stocks and companies have records of stable earning power over several decades. They boast long records of uninterrupted dividend payments to common stockholders.
These stocks are included in the S&P 500 index. Many of the bluest of the blue chips are included in the more selective Dow Jones Industrial Average. They sport solid balance sheets and income statements.
Blue-chip firms are much larger than the typical corporation, often ranking among the world's largest enterprises. They tend to possess a competitive advantage that's hard to beat. This can come in the form of a cost advantage achieved through economies of scale, franchise value in the mind of the buyer, or ownership of strategically important assets such as choice oil fields.
These firms often buy back stock when the share price is attractive relative to owner earnings. They issue bonds that are considered investment grade, with the best of the best being triple-A rated.
Why Blue Chip Stocks Are Popular
One of the reasons investors love blue-chip stocks so much is that they tend to have steady rates of return. The journey isn't always smooth, especially when there's an economic downturn. But, these companies turn a profit over time.
They also aren't volatile. Newer companies may experience ups and downs as they become established. You may see big swings in value, which can be stressful and make it hard to know when to buy or sell. Blue-chip stocks may change in value, but you're unlikely to see dramatic swings in price.
Finally, investors tend to love blue-chip stocks because the strength of their financial statements means that their passive income from dividends is hardly ever in danger. This is especially true if there is broad diversification in the portfolio. If we ever get to the point that many of America's premier blue chips are cutting dividends across the board, investors would have much bigger things to worry about than the stock market. We're most likely looking at the end of the world as we know it.
Examples of Blue-Chip Stocks
Many blue-chip stocks are familiar names, including:
- Amazon (AMZN): Amazon was founded in 1994 by Jeff Bezos. It started as a bookseller but has expanded into selling just about everything. Its low prices and infrastructure provide its competitive advantage. As of 2021, it's worth over $1 trillion.
- Alphabet (GOOGL): Alphabet is a holding company that operates Google, Android, and Chrome and lesser-known companies like Verily and Waymo. As of December 2021, it's also worth over $1 trillion.
- The Coca-Cola Company (KO): Few brands are better known than Coca-Cola. Today, Coca-Cola is a global company with more than 700,000 employees. As of 2021, it's worth about $244 billion.
From time to time, a former blue-chip stock goes bankrupt, such as the demise of Eastman Kodak in 2012. But, even in cases like that, long-term owners can end up making money due to dividends, spin-offs, and tax credits.
Blue-Chip Stocks as Part of a Diversified Portfolio
Short of a catastrophic war or outside context event, there has never been a time in history where you'd have gone broke buying blue-chip stocks as a class. (Assuming, of course, that you are well diversified, hold for a long enough period, and buy at a good price.) Sure, you had periods like 1929-1933, 1973-1974, and 2008-2009, which were times during which many folks watched half of their wealth disappear right before their eyes in terms of quoted market value. That's part of the trade-off. Those times will return, again and again. If you hold equities, you will feel that pain.
It's best to keep in mind that blue-chip stocks are often part of a buy-and-hold strategy with a longer timeline. They can be a key part of a diversified portfolio that includes lower-risk investments like bonds.