What are blue chip stocks? | American News

Blue chip stocks are the publicly traded equity securities of large capitalization companies with an established and highly regarded reputation in the industry.

These are usually companies that provide essential products and services with a long history of profitable operations and competent management.

Often blue chip stocks top various stock indexes like the S&P 500 in terms of market capitalization weighting and are the dominant competitors in their respective sectors. As an investment, blue chip stocks tend to be less volatile than the broader market, have better fundamentals, and can often pay consistent dividends.

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The term “blue chip” was originally used to refer to high value poker chips. Eventually, this term made its way to the stock market to refer to companies with high valuations versus those with smaller market capitalizations.

Blue chip stocks are popular investment choices for retail and institutional investors thanks to their perceived stability. Their earnings reports are widely followed, as good or bad news from a dominant blue chip company can affect the rest of the industry. They tend to dominate market-cap-weighted stock indices due to their size and are often the most weighted stocks in their respective sectors.

There is no exact definition of a blue chip title, but most will have some combination of the following characteristics:

  • Blue chip stocks tend to be the highest weighted components of many top stock indexes, such as the S&P 500 and the Nasdaq Composite.
  • Blue chip stocks often provide essential services and products, such as telecommunications, consumer staples, healthcare or banking.
  • Blue chip stocks range in market capitalization from large (over $10 billion) to mega (over $200 billion).
  • Blue chip stocks often have a wide economic moat, a track record of profitability and steady earnings growth.
  • Blue chip stocks often have strong fundamentals in the form of a healthy balance sheet, deep margins, positive earnings and good debt ratios.
  • Blue chip stocks may have a lower beta, which is a measure of a stock’s sensitivity and volatility relative to the broader market.
  • Blue chip stocks are often considered industry leaders in their sectors and are dominated by market share, customer preference or reputation.
  • Blue chip stocks are often dividend stocks with a long history of consecutive dividend payments, dividend increases and stable payout ratios.

The following companies are among those generally perceived by most investors and the market as blue chip U.S. stocks:

  • Technology sector: Microsoft Corp. (ticker: MSFT), Apple Inc. (AAPL).
  • Financial sector: JP Morgan Chase & Co. (JPM), Bank of America Corp. (LAC)
  • Consumer Staples Sector: Coca-Cola Co. (KO), Procter & Gamble Co. (PG).
  • Energy sector: Chevron Corp. (CVX), Exxon Mobil Corp. (XOM).
  • Healthcare sector: Johnson & Johnson (JNJ), AbbVie Inc. (ABBV).
  • Communications sector: Verizon Communications Inc. (VZ), AT&T Inc. (T).

The following companies are generally viewed by most investors and the market as examples of blue chip international stocks:

  • Technology sector: Constellation Software Inc. (CSU), Samsung Electronics Co. Ltd. (005930)
  • Financial sector: Royal Bank of Canada (RY), Toronto-Dominion Bank (TD).
  • Consumer Staples Sector: Nestlé SA (NESN).
  • Consumer discretionary sector: LVMH Moet Hennessy Louis Vuitton SE (MC).
  • Energy sector: Shell PLC (SHEL), BP PLC (BP).
  • Healthcare sector: AstraZeneca PLC (AZN), Novartis AG (NVS).
  • Communications sector: BCE Inc. (BCE), Telus Corp. (YOU).

FAQs

Investors who want to invest in blue chip stocks can do so through individual companies or by using an index fund. For the first approach, it can be useful to look for large cap stocks with positive earnings, a decent dividend yield and good financial ratios. For the latter, there are a variety of exchange-traded funds or mutual funds that track blue-chip stocks. Filter them by selecting ETFs that hold large-cap stocks or dividend-paying stocks. Factor ETFs that target investment and quality can also be a great way to pick blue chip stocks. A diversified and balanced portfolio of blue chip stocks can be a good long-term investment, especially if dividends are reinvested.
Investing in any type of stock exposes investors to market risk. No matter how strong a particular stock is, a major market downturn or crash like the Great Recession will cause even the most stable stocks to lose value. Additionally, investing in blue chip stocks always carries idiosyncratic risk. Due to a change in fundamentals, direction or future outlook, any business could potentially falter. The bankruptcies of once popular blue-chip stocks like General Motors Co. (GM), Lehman Brothers and Enron are examples of idiosyncratic risk. However, compared to small cap stocks or growth stocks, blue chip stocks tend to be less volatile.
Although blue-chip stocks are an excellent basic investment choice, investors should generally diversify beyond them. The inclusion of mid-cap, small-cap and growth stocks exposes an investor to additional risk factors from which higher returns could be obtained over the long term. Investing only in blue-chip US stocks also leads investors to overlook international stocks, which can outperform when the US market does poorly for long periods. An example is the “lost decade”, between 2002 and 2009, during which US equities traded flat, but international equities in both developed and emerging markets posted strong returns. Blue chip stocks are also concentrated in more traditional sectors such as financials, consumer staples, industrials, utilities and healthcare, which can prevent an investor from taking advantage of growth in emerging industries. .

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