What are “Blue Chip” Stocks?

Blue chip stocks are issued by large companies that boast excellent reputations, dependable earnings and track records of financial success. Many also pay dividends to investors, making them popular core portfolio investments. Examples include Apple, Disney, Home Depot, Johnson & Johnson, Microsoft, and Visa. 

🤔 Understanding blue chip stocks

Unlike many terms in investing, “blue chip” doesn’t have a formal definition. The phrase likely comes from poker, where blue chips are the most expensive. Generally, companies with large market caps and a history of steady profits are considered blue chips. 

Common features of blue chips

Blue chips are typically recognizable household names that operate profitable consumer-facing businesses. They tend to share several traits, such as:

• Name recognition. Most blue chips are household names and industry leaders with proven business models. 
• Large market caps. Most blue chips have valuations in the billions, with many qualifying as large-caps worth $10 billion or more. 
• Economies of scale. Thanks to their enormous size, most blue chips possess a competitive advantage that’s difficult to beat. 
• Sustained profitability. Blue chips have reliable histories of growth and favorable future prospects. They generally produce consistent profits even through recessions, sector disruptions and leadership changes. 
• Dividend payouts. Not all blue chips offer dividends, but many are renowned for their consistent payments. 

Additionally, many blue chips are also key components of market indices like the Dow, S&P 500 and Nasdaq Composite. 

Pros and cons of blue chip stocks

Blue chips tend to be popular core holdings for investors who practice long-term buy-and-hold strategies. Due to their solid reputations, investors may consider blue chips as more stable than small cap stocks. Investors also prefer blue chips due to their:

• Steady rates of return. There’s no guarantee a stock will appreciate, but most blue chips have histories of long-term returns. 
• Relative lack of volatility. Blue chips rarely see the extreme volatility that younger or smaller companies experience. 
• Stable dividend payouts. Blue chips often boast stable financials, which means they rarely slash their dividend payouts once they’re announced. 

That said, it’s not unheard of for blue chips to sink during rough waters or when consumer trends change. Nokia, Lehman Brothers, Kodak, and Sears were all blue chip stocks that declared bankruptcy or faced severe financial struggles. However, such catastrophes are usually the exception, not the rule. 

What this means for you

Many investors use blue chips as core portfolio holdings. However, buying individual shares of blue chip corporations can get pricey in a hurry, as shares often cost hundreds of dollars apiece. 

That’s where low-cost index funds and blue chip-focused exchange-traded funds (ETFs) come in. By investing in these smaller slices of each company, you get instant diversification. 

Alternatively, you can invest in an AI-backed set of Investment Kits that offer instant diversification plus the benefits of artificial intelligence on your side.