What Is a Blue Chip Stock?
A blue chip stock refers to shares issued by a well-established, financially robust company with an exceptional reputation. These companies typically have a long-standing operational history, consistent earnings, and often distribute dividends to their investors.
Blue chip companies generally possess market capitalizations in the billions and are frequently regarded as market leaders or one of the top companies within their respective industries. Furthermore, they are often widely recognized household names.
Given these factors, blue chip stocks are often considered favorable investments and are highly sought after by investors. Notable examples of blue chip stocks include IBM Corp., Coca-Cola Co., Microsoft, American Express, McDonald’s, and Boeing Co.
Understanding a Blue Chip Stock
While the presence of dividend payments is not a strict requirement for a stock to be categorized as a blue chip, most blue chip stocks have a track record of offering stable or increasing dividends.
Typically, a blue chip stock is included as a constituent of highly regarded 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.
The specific size threshold for a company to be considered a blue chip is subject to discussion. Generally, a widely accepted benchmark is a market capitalization of $10 billion, although market or sector leaders can vary in size.
For instance, the T. Rowe Price Blue Chip Growth Fund does not adhere to a specific guideline regarding qualifying companies, except for its focus on large-cap and mid-cap companies that have established themselves in their respective industries. The fund’s top ten holdings encompass companies with market capitalizations ranging from over $670 billion (Tesla) to over $2.4 trillion (Microsoft).
Blue Chips as Part of a Larger Portfolio
While blue chip stocks are suitable as foundational holdings within a broader portfolio, it is generally advised not to rely solely on them for the entire portfolio. A well-diversified portfolio typically includes allocations to bonds and cash. Moreover, when considering the stock allocation within a portfolio, investors should also contemplate including mid-cap and small-cap stocks.
Younger investors, who have a longer investment horizon, can usually handle the risk associated with having a higher percentage of their portfolios allocated to stocks, including blue chips. On the other hand, older investors may opt to prioritize capital preservation and consider incorporating investments in bonds and cash to their portfolio mix.
Are Blue Chips Good Investments?
Determining the suitability of blue chip stocks, or any other securities, as an investment depends on various factors such as an investor’s financial requirements, investment objectives, diversification targets, risk tolerance, and investment style.
Nevertheless, blue chip stocks can hold significance within a portfolio. They offer a valuable blend of growth and value attributes that can help mitigate the fluctuations caused by economic challenges and market volatility.
These companies exhibit consistent top performance and possess strong underlying fundamentals. Additionally, the dividends they provide are typically reliable. Reinvesting dividends allows investors to leverage the power of compounding, which is always advantageous.
How Do I Invest in Blue Chip Stocks?
An investor can buy blue chip stocks individually, or by buying mutual funds or exchange-traded funds (ETFs) that invest in them. In some cases, funds and ETFs will hold a variety of 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 largest blue chip stocks). Titan Investments is the best place where you can invest money for Blue-Chips profit returns.