Blue-chip stocks are shares of large, established, and financially stable companies that have been around for a long time. The term "blue chip" comes from the game of poker, where a blue chip holds the highest value. On Wall Street, a blue-chip stock is usually a highly valued and well-known company with characteristics that benefit investors over the long run, such as stable cash flows and consistent dividends.
Blue-Chip Stock Stability
Most investors understand that blue-chip stocks have stable earnings. During an economic downturn, investors may turn to these perceived "safe havens" because of their steady nature. Some people believe that blue-chip companies can offer security during periods of slower growth due to their experienced executive teams combined with their ability to generate stable profits.
Key Takeaways
- The term "blue chip" comes from poker, where the blue chips hold the highest value.
- On Wall Street, blue-chip stocks are shares of large established companies with steady financials and consistent dividends.
- Since many blue chips are large familiar names, investors typically invest with confidence, believing that these stocks will be the first to rebound after a bear market.
- Consistent dividend payouts over the years can help add an element of stability to share prices as well.
A blue-chip stock is typically large in size (with a market capitalization in the billions) and a leader in its sector or industry. The company is usually a familiar and easily recognizable name, which gives investors a sense of added confidence when adding the stock to their portfolios. That's because, if stocks fall into a bear market, these well-established popular names will likely be among the first to recover. There is little risk that they will go out of business during an economic downturn.
Blue-Chips and Dividends
Since blue-chip shares are typically mature companies that have achieved large market caps, most pay dividends. Dividends represent a portion of the company's profits that are distributed to shareholders in the form of quarterly payments. Smaller companies that are growing fast typically retain all of their earnings in order to invest in future growth. These growth stocks may eventually pay dividends once they are of sufficient size and begin to see fewer opportunities to invest in themselves. At that point, they begin distributing excess earnings to their shareholders. Until then, a fast-growing or young company is not likely to pay any dividends.
A blue-chip stock, on the other hand, has seen increased and uninterrupted dividends over time. In the long run, the benefit to the shareholder from the dividend payments is portfolio income, regardless of the daily swings in the share price. Dividend payments can also help to protect against the adverse effects of inflation because dividends represent earnings, which can increase along with the general cost of living.
The Bottom Line
Blue-chip stocks typically have solid balance sheets, steady cash flows, proven business models, and a history of increasing dividends. For that reason, investors generally consider blue-chip stocks to be among the most secure stock investments because of their track records and performance history. So, while blue-chips are not immune from losses if the broader stock market enters a bearish phase, the idea is that these names will be less volatile than smaller growth companies and will also be the first to rebound when the market eventually recovers.
FAQs
Blue-chip stocks typically have solid balance sheets, steady cash flows, proven business models, and a history of increasing dividends. For that reason, investors generally consider blue-chip stocks to be among the most secure stock investments because of their track records and performance history.
What are the advantages of blue-chip stocks? ›
Reliable return: Blue chip companies typically provide reliable growth potential as well as consistent dividend payments. Low volatility: Blue chips are seen as stable companies/stocks due to their well-tested business models, established operations, dependable revenue, and long-lived brands.
Is blue chip stock a good investment? ›
Investing in blue chip stocks is a good idea for people who want to grow their money over a long time. These are strong and reliable companies that usually do well over many years, making them a safe choice for people who are not in a hurry to make quick money but want to see their investment grow steadily.
Should you hold blue-chip stocks? ›
Blue chips in a well-balanced portfolio
However, just about every investor can benefit from having a portion of their portfolio invested in blue chip stocks. It doesn't have to be a set percentage; investors will have varying viewpoints about how much risk they want to assume.
What is the average return on blue-chip stocks? ›
In general, the average rate of return on blue-chip stocks is around 10%, which is similar to the indices that they are featured on. A good indicator of blue-chip status is if the company is listed on a renowned stock index.
Can you make money with blue-chip stocks? ›
Blue-chip stocks are from companies that are large, well-established, and financially sound. These companies have strong brand names and reputations, and they generate dependable earnings. Blue-chip companies usually boast consistent dividends and are often considered to be less risky, given their financial stability.
Are blue-chip stocks good for beginners? ›
Blue Chip companies are a good place to start if you want to establish a steady and diverse portfolio. They provide an attractive investment opportunity due to their history of market stability, dividends, and capital appreciation potential.
Which bluechip stock is best? ›
Top 10 Blue Chip Stocks in India
- State Bank of India. ...
- Axis Bank Ltd. ...
- NTPC Ltd. ...
- ICICI Bank Ltd. ...
- Hindalco Industries Ltd. ...
- HDFC Bank Ltd. ...
- ITC Ltd. ITC Limited is a holding company engaged in the marketing of fast moving consumer goods (FMGC). ...
- Bajaj Finance Ltd. Bajaj Finance Limited is a non-banking finance company (NBFC).
They get their nickname from blue poker chips, which tend to be high-value chips in the game. Many blue chip stocks pay dividends every year like clockwork. Some of them, called “Dividend Aristocrats” have not only paid dividends, but have grown their dividends every year without fail for at least 25 consecutive years.
What is the difference between a regular stock and a blue-chip stock? ›
Income stocks provide regular income by distributing a company's profits, or excess cash, through dividends that are higher than the market average. Blue-chip stocks are shares of well-established companies with a large market capitalization.
Here's are three cons of investing in big-name companies.
- returns can be on the low side. While blue chips typically deliver reliable returns, this shouldn't be confused with high returns. ...
- they're usually expensive. If you want to add a big-name, established company to your portfolio it'll cost you. ...
- they aren't risk-free.
Over time, including in 2022 as noted above, the blue-chip stocks of the Dow tend to outperform other key indexes, such as the S&P 500, during bear or down markets.
Is Tesla a blue-chip stock? ›
The problem is that despite being included in blue chip ETF indexes, companies like Nvidia and Tesla aren't truly blue chip stocks, George Pearkes, an analyst at Bespoke, told CNN. They're much more volatile.
Is Coca-Cola a blue-chip stock? ›
For example, Coca-Cola is a blue chip company that might not suffer from a recession because many choose to drink its products, regardless of economic conditions. Blue chip companies have generally demonstrated stable growth rates throughout their history.
Is Costco a blue-chip stock? ›
By investing in blue-chip stocks, investors can build a well-diversified portfolio. Here, we have identified four stocks from the Retail - Wholesale sector — Walmart Inc. WMT, Costco Wholesale Corporation COST, The Home Depot, Inc. HD and Lowe's Companies, Inc.
Why do investors buy blue-chip stocks? ›
Because blue chip companies are relatively stable, blue chip stocks are considered a low-risk investment. In all likelihood, no matter what happens tomorrow, the most established companies in the banking or real estate sector would not collapse overnight, so investing in them is a relatively safe bet.
Why are Blue chips better? ›
A blue-chip stock is typically large in size (with a market capitalization in the billions) and a leader in its sector or industry. The company is usually a familiar and easily recognizable name, which gives investors a sense of added confidence when adding the stock to their portfolios.
Why do investors select blue-chip stocks? ›
Investors select "blue chip" stocks because they: Have a reputation for quality management and sometimes pay dividends.
