Blue-chip stocks are shares of large, established, and financially stable companies that have been around for a long time. The term "blue chip" comes from the game of poker, where a blue chip holds the highest value. On Wall Street, a blue-chip stock is usually a highly valued and well-known company with characteristics that benefit investors over the long run, such as stable cash flows and consistent dividends.
Blue-Chip Stock Stability
Most investors understand that blue-chip stocks have stable earnings. During an economic downturn, investors may turn to these perceived "safe havens" because of their steady nature. Some people believe that blue-chip companies can offer security during periods of slower growth due to their experienced executive teams combined with their ability to generate stable profits.
Key Takeaways
- The term "blue chip" comes from poker, where the blue chips hold the highest value.
- On Wall Street, blue-chip stocks are shares of large established companies with steady financials and consistent dividends.
- Since many blue chips are large familiar names, investors typically invest with confidence, believing that these stocks will be the first to rebound after a bear market.
- Consistent dividend payouts over the years can help add an element of stability to share prices as well.
A blue-chip stock is typically large in size (with a market capitalization in the billions) and a leader in its sector or industry. The company is usually a familiar and easily recognizable name, which gives investors a sense of added confidence when adding the stock to their portfolios. That's because, if stocks fall into a bear market, these well-established popular names will likely be among the first to recover. There is little risk that they will go out of business during an economic downturn.
Blue-Chips and Dividends
Since blue-chip shares are typically mature companies that have achieved large market caps, most pay dividends. Dividends represent a portion of the company's profits that are distributed to shareholders in the form of quarterly payments. Smaller companies that are growing fast typically retain all of their earnings in order to invest in future growth. These growth stocks may eventually pay dividends once they are of sufficient size and begin to see fewer opportunities to invest in themselves. At that point, they begin distributing excess earnings to their shareholders. Until then, a fast-growing or young company is not likely to pay any dividends.
A blue-chip stock, on the other hand, has seen increased and uninterrupted dividends over time. In the long run, the benefit to the shareholder from the dividend payments is portfolio income, regardless of the daily swings in the share price. Dividend payments can also help to protect against the adverse effects of inflation because dividends represent earnings, which can increase along with the general cost of living.
The Bottom Line
Blue-chip stocks typically have solid balance sheets, steady cash flows, proven business models, and a history of increasing dividends. For that reason, investors generally consider blue-chip stocks to be among the most secure stock investments because of their track records and performance history. So, while blue-chips are not immune from losses if the broader stock market enters a bearish phase, the idea is that these names will be less volatile than smaller growth companies and will also be the first to rebound when the market eventually recovers.
FAQs
Blue-chip stocks typically have solid balance sheets, steady cash flows, proven business models, and a history of increasing dividends. For that reason, investors generally consider blue-chip stocks to be among the most secure stock investments because of their track records and performance history.
What are the benefits of blue chip funds? ›
Advantages of Blue Chip Funds
You can develop abundant capital over the long haul by investing in blue chip funds. Investing in a company with a strong track record creates the scope for making a solid portfolio. Additionally, it provides stability during unpredictable stock market situations.
Are blue chip stocks a good investment? ›
Blue chip stocks are usually less risky and thus considered safer than other stock-based investment options. That's because one of the major determining factors of a blue chip stock is that it must be a well-capitalized company, meaning it should have the financial fortitude to endure an inevitable economic downturn.
What makes a blue chip stock attractive to investors? ›
Firstly, blue-chip stocks are typically associated with large, well-established companies that have demonstrated resilience and longevity in the market. These companies often boast solid financial fundamentals, including strong balance sheets, consistent earnings growth, and stable cash flows.
Can you make money with blue chip stocks? ›
Usually, blue-chip companies were established many years ago and consistently boast a large consumer following, as well as boasting a high market capitalization of over one billion dollars. In turn, blue-chip stocks can be a particularly good investment for traders with a balanced portfolio.
What are the advantages of blue chip stocks? ›
Blue-chip stocks typically have solid balance sheets, steady cash flows, proven business models, and a history of increasing dividends. For that reason, investors generally consider blue-chip stocks to be among the most secure stock investments because of their track records and performance history.
What does blue chip benefits mean? ›
Investing in blue chip stocks offers many benefits, including stability, predictability, and steady growth potential. Blue chip companies are typically well-established, well-managed, and have a strong financial foundation, making them less risky than other investments.
What are the disadvantages of blue-chip stocks? ›
Although blue chips are reliably stable, they are unlikely to generate the same high returns as potentially riskier investments. Despite their stability, blue chip stocks can experience volatility and failure, as did some during the 2007-2008 financial crisis.
What is the average return on blue chip shares? ›
According to the ASX 200 index, the index has returned an average annual return of around 9.5% over the last 10 years. This article highlights 5 blue chip stocks in the Australian stock market in 2023, focusing on their stock code, index percentage, market cap, and revenue etc.
Which blue chip stock is best? ›
Blue Chip Stocks (Excluding Banking Companies)
| Sr. No. | Company Name | BSE Code |
|---|
| 1 | Asian Paints Ltd. | 500820 |
| 2 | Avenue Supermarts Ltd. | 540376 |
| 3 | Bajaj Auto Ltd. | 532977 |
| 4 | Bharti Airtel Ltd. | 532454 |
1 more row5 days ago
A positive earnings reaction for blue chip retail giant Walmart (WMT, +7.0) helped to boost the Dow above 40k in mid-morning trading.
Is Costco a blue chip stock? ›
By investing in blue-chip stocks, investors can build a well-diversified portfolio. Here, we have identified three stocks from the Retail - Wholesale sector — Lowe's Companies, Inc. LOW, Costco Wholesale Corporation COST and Walmart Inc. WMT.
Is Tesla a blue chip stock? ›
The problem is that despite being included in blue chip ETF indexes, companies like Nvidia and Tesla aren't truly blue chip stocks, George Pearkes, an analyst at Bespoke, told CNN. They're much more volatile.
Why would someone not want to invest in blue chip stocks? ›
“Investors need to keep in mind that no matter how large or stable a company might appear, if there is a catastrophic event or a feeling that the market might collapse, investors can push the value of even blue chip companies down. I've seen blue chip companies lose 30% of their value over a three month period.
Should I only buy blue chip stocks? ›
Many investors turn to blue chips for their longstanding, rising dividends. Many investors believe that blue chips can survive market challenges of many kinds; while this may be largely true, it is not a guarantee. For this reason, it's crucial to diversify a portfolio beyond only blue chip stocks.
What is the return rate of blue chip fund? ›
1. Current NAV: The Current Net Asset Value of the SBI Bluechip Fund as of May 16, 2024 is Rs 81.67 for Growth option of its Regular plan. 2. Returns: Its trailing returns over different time periods are: 21.39% (1yr), 15.31% (3yr), 15.99% (5yr) and 12.08% (since launch).
Why is the blue chip important? ›
A blue chip stock is a company that typically has a large market cap, a sterling reputation, excellent financials, and many years of success in the business world. A blue-chip index seeks to track the performance of financially stable, well-established companies that provide investors with consistent returns.
Is blue chip Growth fund a good investment? ›
Fidelity Blue Chip Growth Fund (FBGRX) is a potential starting point. FBGRX has a Zacks Mutual Fund Rank of 2 (Buy), which is based on various forecasting factors like size, cost, and past performance.
What is the return of blue chip fund? ›
1. Current NAV: The Current Net Asset Value of the SBI Bluechip Fund as of May 14, 2024 is Rs 80.91 for Growth option of its Regular plan. 2. Returns: Its trailing returns over different time periods are: 21.39% (1yr), 15.31% (3yr), 15.99% (5yr) and 12.08% (since launch).
Is Fidelity blue chip fund good? ›
Overall Rating. Morningstar has awarded this fund 5 stars based on its risk-adjusted performance compared to the 1109 funds within its Morningstar Category.
