What Is a Blue Chip Stock?
A blue-chip stock is a massive company with an excellent reputation. These are typically large, well-established, and financially sound companies that have operated for years and have dependable earnings, often paying dividends to investors. A blue-chip stock typically has a market capitalization in the billions, is generally the market leader or among the top three companies in its sector, and is, more often than not, a household name. For all of these reasons, blue chip stocks are among the most popular to buy among investors. Some examples of blue chip stocks are IBM Corp., Coca-Cola Co., and Boeing Co.
KEY TAKEAWAYS
- Blue chip stocks are enormous companies with excellent reputations, often including some of the biggest household names.
- Investors turn to blue chip stocks because they have dependable financials and often pay dividends.
- There is a perception among investors that blue chips can survive market challenges of many kinds; while this may be largely true, it is not a guarantee. For this reason, it’s crucial to diversify a portfolio beyond only blue-chip stocks.
Understanding a Blue Chip Stock
While dividend payments are unnecessary for a stock to be considered a blue chip, most blue chips have long records of paying stable or rising dividends. The term is believed to have been derived from poker, where blue chips are the most expensive.
A blue-chip stock is generally a component of the most reputable market indexes or averages, such as the Dow Jones Industrial Average, the Standard & Poor’s (S&P) 500, and the Nasdaq-100 in the United States, the TSX-60 in Canada, or the FTSE Index in the United Kingdom.
How big a company needs to be to qualify for blue chip status is open to debate. A generally accepted benchmark is a market capitalization of $5 billion, although market or sector leaders can be companies of all sizes. The T. Rowe Price Blue Chip Growth Fund doesn’t have a specific guideline for what type of company qualifies outside of focusing on large-cap and mid-cap companies that are well-established in their industries. However, the median market cap of the fund’s holdings has historically been in the range of close to $100 billion.
The Safety of Blue Chip Stocks
While a blue chip company may have survived several challenges and market cycles, leading to it being perceived as a safe investment, this may not always be the case. The bankruptcies of General Motors and Lehman Brothers, as well as several leading European banks during the global recession of 2008, are proof that even the best companies may struggle during periods of extreme stress.
Blue Chips as Part of a Larger Portfolio
While blue chip stocks are appropriate for use as core holdings within a larger portfolio, they generally shouldn’t be the entire portfolio. A diversified portfolio usually contains some allocation to bonds and cash. Within a portfolio’s allocation to stocks, an investor should also consider owning mid-caps and small-caps. Younger investors can generally tolerate the risk of having a more significant percentage of their portfolios in stocks, including blue chips. In comparison, older investors may focus more on capital preservation through more effective investments in bonds and cash.
What Makes a Company a Blue Chip?
Blue chip stocks are the titans of their sectors—industry-defining companies that are well-known, well-capitalized, long-term stable plays with solid financial prospects.
What Companies Are Considered to Be Blue Chips?
Many of the largest companies in the S&P 500 or the Dow 30, such as IBM, JPMorgan Chase, and Walmart.
Where Does the Term “Blue Chip” Come From?
The term “blue chip stock” comes from the world of poker, where chips used in gambling have different colors to represent different dollar amounts. A blue chip is typically the one with the highest value, surpassing white and red chips.
Are Blue Chips a Good Investment?
A diversified portfolio might include the ownership of a rash of blue-chip stocks, meaning the stocks of large, well-capitalized, well-understood companies, among various other holdings. In addition to owning individual stocks, investors may seek blue-chip exposure by purchasing mutual funds or exchange-traded funds (ETFs).
How Do I Invest in Blue Chip Stocks?
A market participant can buy blue-chip stocks individually or by purchasing mutual funds or exchange-traded funds (ETFs) that invest in blue-chip stocks. In some cases, funds and ETFs will hold various stocks and asset classes, including blue chips. In other cases, the funds or ETFs might be focused exclusively on blue chips, such as an ETF that tracks the Dow Jones Industrial Average, which comprises 30 of the most extensive blue chip stocks.