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Blue-chip stocks are well-known companies that generally have long-term track records of success. A blue-chip company tends to be a large, well-established leader in its sector and may also have a substantial consumer-facing business. This means that you may be familiar with the company by virtue of using its products or services, in addition to considering an investment in its stock.
Blue chip stock definition: What it means if a company is blue chip
Because blue-chip stocks are usually the most dominant names in their respective industries, there are a limited number of them. However, there is no official list of blue-chip stocks or any formal arbiter who dictates which companies land the blue-chip designation. Sometimes investors refer to the 30 stocks in the Dow Jones Industrial Average as “the blue chips,” but a stock needn’t be in that index to be considered a blue chip.
Instead, there are some key characteristics associated with these companies and therefore their stocks:
- Sustained success
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A blue-chip company has a demonstrated track record of success, which often means it isn’t going away anytime soon. The historical performance of its stock price will show positive price appreciation over a long period of time. While blue-chip companies are not immune from the ups and downs any publicly traded company experiences, their ability to generate consistent profits throughout leadership changes, technological disruption and other headwinds is fairly consistent.
- Significant size
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Consistent profits over an extended period of time translate to a formidable size. Blue-chip stocks tend to be companies with “mega” market capitalizations (for example, a market cap of $200 billion or higher), but even “regular” large-cap stocks might be blue chips.
- Dividend payments
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The vast majority of blue-chip stocks pay regular dividends to investors. There are some exceptions to this rule, but many blue-chip companies reward long-term investors with a consistent and generally increasing stream of dividend payments over many years.
Blue-chip stocks may fall out of favor
Those three ingredients are attractive for any investor. However, a sports analogy may demonstrate the subjectivity involved in identifying blue-chip stocks. Plenty of the most accomplished stars in professional sports appeared on “blue-chip” lists before going pro, and they proved deserving of the title. Other entrants on those blue-chip rankings, though, did not pan out whether due to injury or another reason.
In investing, some companies may check the boxes to belong to the coveted blue-chip club for a while, only to eventually fall from grace. Consider Kodak (KODK), a company that was the undeniable leader in photography before filing for bankruptcy in 2012. (Kodak has since returned to Wall Street, but the company is nowhere near its previous level of dominance.)
Or consider Sears, a pioneer in American retail and once the largest retailer in America — which has just a tiny handful of stores today. The lesson is simple: Being a blue-chip stock isn’t a designation that a company retains forever.
Examples of blue-chip stocks
While this is by no means an exhaustive list of all the stocks that can be classified as blue chips. This sampling helps show that blue-chip stocks come from all industries.
Here are some examples of blue-chip stocks.
- Apple (APPL)
- Coca-Cola (KO)
- Home Depot (HD)
- JPMorgan Chase (JPM)
- Amazon (AMZN)
- Bank of America (BAC)
- Johnson & Johnson (JNJ)
- Microsoft (MSFT)
- McDonald’s (MCD)
- Procter & Gamble (PG)
- Walmart (WMT)
Should you invest in blue-chip stocks?
Despite the Kodak and Sears examples, it’s important to note that blue-chip stocks can be the bedrock of an investing portfolio. Some may still be in full-on growth mode while many others are very mature companies. Even those slower-growing names can be attractive long-term investments, in part because of the dividends those companies often pay.
If you’re trying to figure out whether to invest in blue-chip stocks, here’s something important to consider: You might already invest in them. If you are invested in any kind of broad-based index fund, you probably already own many of the stocks broadly considered to be blue chip. For example, if you own an S&P 500 index fund, you own plenty of blue-chip stocks.
Alternatives to blue-chip stocks
If you’re new to investing and considering buying individual blue-chip stocks, you may reconsider and instead invest in a broader, diversified index. For example, the S&P 500 includes all the major blue-chip names, while also including plenty of other companies that are profitable and growing. By investing in a diversified index, you have less risk that any individual blue-chip stock you choose becomes the next Sears when you’re not paying attention.
Broader index funds such as the Russell 1000 include major companies like Amazon, Apple and JPMorgan Chase, plus mid-cap companies that may be far from maturity (those that are growing faster but riskier as investments). These index funds deliver the crucial ingredient of diversification. Rather than tying your fortunes to one or two major companies, your money has a chance to benefit from a wide range of businesses that sell and serve different market segments.
Bottom line
While blue-chip stocks may seem like a safe and solid investment, it’s important to remember that even these companies can fall from grace. As seen with examples like Kodak and Sears, being a blue-chip stock doesn’t guarantee long-term success. Still, blue-chip stocks can be a valuable addition to a diversified portfolio. It’s important to do thorough research and consider alternatives, such as broad-based index funds, to mitigate the risk of relying on only a few individual stocks.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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