Stock Markets: What are blue-chip stocks?

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New stock market investors, especially the gen-z investors, keep a close look at meme stock and cryptocurrency, while paying no attention to the “blue-chip” stocks. A portfolio built solely on the high volatility meme stocks and cryptocurrency can rarely yield consistent returns.

This post aims to introduce what “blue-chip” stocks are, and why having them in your portfolio is a good idea.

A blue-chip stock is a stock from the market’s highest-quality companies, known for their low risk and reliable performance.

However, although blue-chip stocks are stable and pay high dividends, they are typically expensive and don’t grow much. This is the main reason why blue-chip stocks are favored by older or more conservative investors but not the gen-z.

What is a “blue-chip”?

The term “blue-chip” is a term borrowed from gambling (casinos and card-games). And just as blue chips in poker hold the highest value, so do blue-chip stocks in the stock market. They represent the cherry on the top of equities – the biggest, richest companies. Many of them are household names.

Blue-chip stocks provide a way to invest in stable, good performing corporations with minimal risk. Plus, they usually pay good dividends.

Blue-chip stocks also occupy the most venerated strata of the stock market. As leaders in their industries, these companies have strong histories – some are over 100 years old – and deliver consistently strong performance. Whether the market overall is up or down, blue chips prove themselves as steady and reliable investments. As a result, their share prices tend to be high.

What makes a stock a blue chip?

No official guidelines exist around the size and value of blue-chip companies. But they do share some characteristics:

  • Large market capitalization: blue chips tend to be huge, well-financed corporations. Their market capitalization is in the high billions, putting them in the category of large-capitalization stocks. The cheapest of these large caps enjoy a value of at least $5 billion; most are north of $10 billion.
  • Growth history: blue-chip companies display years, sometimes decades, of sustained growth and ongoing prospects. Their share prices rarely jump dramatically, but they can show steady appreciation over time.
  • Stock index: blue chips occupy positions in the major market indexes: the Dow Jones Industrial Average, S&P 500, the Nasdaq 100. A company is often seen to have “made it,” blue-chip status-wise, if on one of these lists, which act as bellwethers for the stock market itself.
  • Dividends: while not always a feature, many blue chips pay shareholders a good steady dividend. As mature companies, blue chips focus less on growth than start-ups and other businesses that need to continually seed development. For blue-chips, the freed up cash flow allows companies to share profits with stock owners through dividend payments. As profit margins grow, the dividends often increase as well.

Blue-chip stocks list

Blue-chip stocks include notable names familiar to almost everyone, a trait attributable either to their long histories or their positions as industry leaders. Some of them include: Alphabet (GOOGL), Amazon (AMZN), American Express (AXP), Apple (AAPL), Bank of America (BAC), Coca-Cola (KO), Costco (COST), IBM (IBM), Johnson & Johnson (JNJ), etc.

Pros and cons of Blue-chip stocks

Investors find a number of benefits in owning shares of blue-chip companies, including:

  • Low volatility: as big corporations, blue-chip companies benefit from economies of scale and also enjoy revenue streams from multiple products and services. While not immune from economic downturns, well-established blue chips are not easily shaken, even in times of market volatility.
  • Dependability and transparency: with their long histories and status as industry leaders, blue chips operate with seasoned management teams. The companies’ fame and high profiles tend to keep their operations transparent.
  • Rich income: steady earnings without a need to invest heavily in growth means blue chips can provide steady, strong dividend payments. Next to US Treasuries, blue-chip dividends are the most reliable go-to for income-oriented investors.

On the flip side, the blue-chip features that work as benefits from some investors act as deterrents for others.

  • Low growth: unless you invested in one decades ago, you won’t make a killing in blue-chip stocks. These are mature companies, for the most part – their big-growth days are behind them. They appreciate steadily, but not dramatically. That’s the trade-off for their low risk.
  • Expensive: no bargains here – blue-chip stocks have been discovered. Because blue chips play in the large-market cap sandbox, the price to buy in on a single share often runs a couple hundred dollars or more. For many younger investors. The share cost far exceeds the level needed to acquire a stock position of any significant size.
  • Strong but not invulnerable: sometimes a sterling reputation can hide the fact that a blue chip is resting on its laurels and failing to innovate. Monolithic corporations can be slow to respond to changing times, consumer demands and industry trends. Though it happens rarely, blue chips can and do go bankrupt: General Motors and Lehman Brothers are two recent examples.

The financial takeaway

The security of blue chips ranks at the top of their appeal to investors. Blue chips’ history of weathering even the stormiest of times puts them in a kind of safe-haven category. This gives investors comfort in knowing these stocks emerge less scathed than their counterparts in rocky times.

These stock-market stalwarts look especially attractive to older investors, who are often risk-averse, dislike volatility, and seek income from their investments. More often than not, younger investors, who want bigger growth and can take chances, avoid blue chips for these very reasons: the lack of flash and hype, and the high price of their shares.