As I think about my early days of investing I recall learning about the importance of some of my early blue chip stock investments. It got me to thinking why is it so important to invest in Blue Chip stocks?
Blue Chip stocks are an essential part of any well diversified portfolio because they are widely considered to be secure investments. Historically, Blue Chippers have gained a solid reputation as steady growth performers that also pay dividends. They are also seen as being impervious to market downturns.
What are Blue Chip Stocks
Blue-chip stocks are stocks of well established companies that have strong business models, cash flows and balance sheets. The term Blue Chip comes from the blue chips used in a game of poker. Blue chips represent the highest value.
Blue chip stocks are often considered boring investments but they are some of the most popular stocks among the wealthiest investors. These companies are universally known. Their products are everywhere and you probably have some in your own home right now.
Windex, Tide, Pepsi, Cheerios, Folgers Coffee; these are just a few household items you have heard of that are produced by Blue Chip Companies.
Why are Blue Chip Stocks popular?
Blue chippers are some of the highest volume stocks traded. They have gained popularity due mostly to their long history of reliability. These companies are usually household names.
Think IBM or Coca Cola.
Here is a list of qualities Blue Chip stocks possess that make them attractive to investors.
- Established history of strong earning power.
- Strong executive management teams who can be relied upon to make sound decisions to carry that company safely into the future.
- Participate in regular stock repurchasing programs letting investors know they believe in their own company.
- They have strong cash flow, balance sheet, income statement, and debt ratio.
- Blue Chippers have a long standing history of paying dividends.
- They have a long history of rewarding their shareholders by increasing those dividends over time.
- Have market caps larger than the typical corporation
- Are included in major indexes like the S&P 500 and/or Dow Jones Industrial Average.
Stability
Blue Chip stocks have a long history of being stable investments. They have been around for many years and have grown into household names. They aren’t going anywhere.
Investors can feel safe in knowing that their money is safe. The general consensus is that regardless of market fluctuations, blue chip stocks will almost always bounce back.
Dividends
Dividend payments are not a requirement for a company to be considered a Blue Chip stock. However the majority of companies that are considered Blue Chippers have a long history of paying dividends. Most in fact have a history of increasing dividends and all of your dividend aristocrats are going to be considered blue chip.
A dividends aristocrat is a company that has paid out a dividend for 50 years or more consistently. I also like to re-invest my dividend payments back into the company using a dividend reinvestment program so that I get even more shares and then even more dividends. I wrote articles dedicated the topics of dividends and another on compounding which you can check out below.
For more on dividends, check this out
For more on Compounding, check this out
Safe Haven
Another reason blue chip stocks are popular is that they offer somewhat of a safe haven during economic down turns or bear markets. Part of this can be explained by the fact that that dividend-paying stocks tend to fall less in bear markets and most Blue Chippers pay dividends. Many investors don’t think about this because they are looking for the next big thing. The next Amazon, Facebook, or Apple.
Blue Chippers tend to get forgotten about or dismissed because that are the boring tedious way to become wealthy. Lets face it, there is noting sexy about a 3.5% dividend yield and a 6% annual gain when compared to the excitement of that newest IPO that doubled in a day.
What are the risks and rewards of investing in Blue Chip Stocks?
Like any investment, there is always a chance you can lose money. Blue Chip stocks are no exception. One such risk with Blue Chippers is the possibility of an investor becoming overconfident.
I learned this lesson the hard way with GE in 2018. As it began to fall I thought there was no way it could collapse. After all the company has been a staple of the DOW forever and is over 100 years old. They had paid a dividend for over 100 years . How could I possibly lose?
I had allowed my overconfidence to get the best of me and before I knew it I had lost over half of the money I invested in the company.
What are some of the best Blue Chip Stocks to invest in?
There is no formal list of Blue Chip stocks and qualifications are open to debate. Most investment firms will not even qualify the companies they include in their blue chip funds. One generally accepted benchmark is that the company must meet a market cap of $5 Billion.
It is probably easier if you see some examples of companies that are considered blue chip and you will begin to understand. Below is a list of some of my favorites and a great starting point for you to begin researching companies for your own portfolio.
- Disney (DIS)
- Intel (INTC)
- International Business Machines (IBM)
- Coca Cola (KO)
- Apple (AAPL)
- McDonalds
- Exxon Mobil Corp (XOM)
- Chevron Corp (CVX)
- 3M Co. (MMM)
- Microsoft Corp (MSFT)
- Johnson & Johnson (JNJ)
- Ceterpillar Inc. (CAT)
- Verizon Communications Inc (VZ)
- AT&T Inc (T)
- Bank of America Corp (BAC)
- Pfizer Inc (PFE)
- American Express Co. (AXP)
- Wal-Mart Stores (WAL)
- JPMorgan Chase & Co (JPM)
- Hewlett Packard Co. (HPQ)
Blue Chip Index Funds
Despite their stable history, there is no guarantee that an individual blue chip stock will continue to perform the same in the future. The financial crisis of 2008 led to the bankruptcy of several blue chippers, and wounded many more.
If you wish to truly take advantage of the long term potential Blue Chip stocks offer, it might make sense to invest in a diversified bundle of stocks rather than trying to pick the right one company. This way if one company falls upon tough times, you have many more to back them up.
A low-fee Blue Chip ETF will allow you to invest in several companies at once thus diversifying your holdings and lowering your risk. You could invest in one of the many funds that mimics the DOW or other funds that focus primarily on large caps or dividends, there are endless possibilities. If you are looking to take advantage of Blue Chips while minimizing risk, ETFs are a great option.
Conclusion
Despite my bad experience with GE I still invest heavily in blue chip, dividend paying stocks. In fact, along with Index Funds, Blue chippers help make up over the majority of my portfolio. I like knowing that the odds are in my favor and I love receiving and reinvesting those dividends.
Whatever you choose, make sure to do your homework first. Never invest in any fund or company simply because someone told you to, no matter how stable the investment appears. Take their suggestion and do your research before committing your hard earned money.
Thanks for reading and Happy Investing
Earl