What Is a Blue Chip?

Blue Chips Explained in Less Than 3 Minutes

Blue chips on a stock certificate
•••

Sandra Baker / Getty Images

Blue-chip is a term that is used regarding a company's financial stability and reputation. The name comes from the game of poker—blue chips have the highest value.

Learn more about how to include blue-chip companies and stocks in your investment portfolio.

Definition and Examples of Blue Chips

Blue-chip refers to how financially stable and reputable a company is. You may hear about blue-chip companies. But often, when it comes to investing, you will hear about blue-chip stocks.

At its core, the term refers to shares of companies that are thought to be significantly safer than a vast majority of stocks.

Famous examples of blue-chip stocks include Coca-Cola, Disney, and McDonald's.

Alternate name: bellwether stocks (less commonly used)

How Do Blue-Chip Stocks Work?

Blue-chip stocks are thought to be safer than other stocks due to a combination of factors. These factors include, but are not limited to:

  • Excessive financial strength, either in the form of little to no debt or enormous cash reserves that promise a high probability of surviving even another Great Depression;
  • Near impenetrable competitive advantages that make it possible to earn high returns on equity and/or high returns on assets while keeping others at bay;
  • Lower levels of volatility over long periods of time relative to the stock market as a whole;
  • A history of dividend growth significantly in excess of the rate of inflation, year after year, decade after decade, generation after generation.​

Imagine your family invested in Coca-Cola back in 1919: a single share purchased for $19. Over the past century, Coca-Cola has become so prosperous that it is thought to profit from roughly 3.5% of all liquids consumed on the planet each day—including tap water—thanks to its portfolio of 500+ beverage brands.

These days, that singular $19 share would be worth more than $10 million with dividends reinvested. Blue-chip investing, when done correctly, can be extremely prosperous.

How to Find Blue-Chip Stocks for Your Portfolio

When it comes to finding blue-chip stocks for your own portfolio, there are a few places you can start. First, look up the current list of "Dividend Aristocrats" published by research firm S&P Dow Jones Indices. These are blue-chip stocks that have raised their dividend every year for at least a quarter of a century (25 years); this is quite an astonishing achievement.

Next, look through the individual components of both the Dow Jones Industrial Average and the S&P 500. Go page-by-page through something like the Value Line Investment Survey and look for firms with the financial ratios that appeal to you.

Keep your standards high when putting together your preliminary list of blue-chip stocks. You're looking for extraordinary enterprises such as Johnson & Johnson, Colgate-Palmolive, and Hershey. You want to know that even if the country goes into the worst economic meltdown in centuries, the odds are decent your checks are going to arrive in the mail like clockwork.

Key Takeaways

  • Blue-chip is a term that is used regarding a company's financial stability and reputation. The name comes from the game of poker—blue chips have the highest value.
  • At its core, the term refers to shares of companies that are thought to be significantly safer than a vast majority of stocks.
  • By investing in blue chips, even if the country goes into the worst economic meltdown in centuries, the odds are decent your checks are going to arrive in the mail like clockwork.