Investors may refer to blue-chip stocks or blue-chip companies interchangeably. These companies typically are financially sound, have produced consistent growth over several years, have dependable earnings, and have histories of dividend payouts. There is no formal list of blue-chip stocks, nor is there any entity that officially designates which stocks are blue chip. There are key common characteristics of companies that are considered to be blue chips, including:
A strong track record of performance: Although blue-chip stocks are susceptible to the ups and downs of the overall market, these companies have positive price appreciation over a number of years. Large and market-leading: Because blue-chip companies consistently turn in strong performances, they grow to be large companies—typically with a market capitalization in the billions. They frequently are among the leaders in their industries. Lower levels of volatility: Blue-chip stock prices fluctuate with the overall market, but over long periods, they are less volatile than small-cap stocks and other classifications. Steady dividends: Many blue-chip companies pay dividends. In fact, it is common for the dividend to grow over the years.
Example of a Blue-Chip Stock
Coca-Cola Company is an example of a blue-chip company whose stock has increased significantly and steadily over more than a century, and it has a strong dividend-payout history. Coca-Cola has increased its dividend payment for more than 58 consecutive years.
Pros and Cons of Blue-Chip Stocks
Pros Explained
Low market volatility: Typically, blue-chip stocks will not see frequent large changes in their stock prices. That can offer some comfort to investors looking to gain from share price appreciation.Strong track record: Blue chip companies generally are industry leaders that have been in operation for a substantial amount of time. That gives them long track records of not just operations, but financial and stock performances that investors could consider before investing.Dividend payouts and compounding: Blue-chip companies tend to have long dividend payout histories, which can be beneficial in two ways. First, dividends offer an income stream. Second, if you choose to reinvest those dividends, you can exponentially increase gains from your investments as that money compounds. For example, according to The Coca-Cola Company, a single share of Coca-Cola stock cost $40 when it became available in 1919. With dividends reinvested, that single share was worth approximately $10 million in 2012.
Cons Explained
No outsized gains: Since blue-chip companies are already well established and their stocks deliver little volatility, they have less potential for outsized growth or returns compared to small- and mid-cap stocks. No guarantee against failure: Just because a company is dubbed as a blue chip, that doesn’t mean it’s going to be a good investment. There are many blue-chip companies that have lost this status and proven to be unworthy investments. For example, General Electric, one of the original members of the Dow in 1896 and a continuous member since 1907, was dropped from the index in 2018 after a prolonged period of stock underperformance.
Do You Need Blue-Chip Stocks?
Diversification is a well-grounded tenet of any long-term investment strategy. Blue-chip stocks can make a solid foundation for an investment portfolio, but most financial advisers recommend that investors diversify their portfolio with several classifications of assets, even into retirement. Small-cap and mid-cap stocks may provide more potential for growth. Additionally, investors may wish to hold bonds, cash, or other assets. Blue-chip stocks may decline in value or remain flat during a period when small-cap stocks, stocks of foreign companies, or bonds are rising.
How To Find Blue-Chip Stocks for Your Portfolio
Investors can purchase blue-chip stocks individually or through various mutual funds. The Dow Jones Industrial Average tracks the price of 30 of the largest blue-chip stocks listed on U.S. stock exchanges. Research firm S&P Dow Jones Indices regularly updates a list of S&P 500 Dividend Aristocrats, which measures the performance of S&P 500 companies that have increased dividends every year for the last 25 consecutive years. Many brokerages offer Dividend Aristocrat index funds as well as other blue-chip index funds or exchange-traded funds.
What Blue Chips Mean for Investors
Blue-chip stocks are a common component of many investors’ portfolios, no matter the investor’s age or investment style. Because blue chips are large, proven businesses spread across a wide range of industries, they are less volatile than shares of smaller companies. Investors—especially retired investors who are looking for some income—also appreciate the dividends that blue chips often pay. Keep in mind that these stocks fluctuate in value along with the rest of the market, and just because they are considered blue chips, does not mean they are immune from failure.
