WHAT ARE
BLUE-CHIP STOCKS?

Are you interested in learning about blue-chip stocks, and discovering what sets them apart from other stocks? Find out what they are, some popular examples and why you should add them to your portfolio.

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Regardless of your age or investment style, blue-chip stocks can play a huge role in helping an investor to build a well-rounded portfolio, so, what are blue-chip stocks? Read on to learn more about these important investments, how they can help you build a strong portfolio and how they still come with risk.

What is a blue-chip stock?

A blue-chip stock refers to the shares of a well-established, widely recognised and profitable public company. Nationally or internationally, a blue-chip company will be high quality and financially healthy, often established and grown over a prolonged period of time.

Generally, a blue-chip stock is that of a company with a combination of the following characteristics:

• Large organisation with a large market capitalisation
• Well-established, often a household name
• Good reputation, often an industry leader known for selling high-quality goods or services
• Stable earnings foundation, history of reliable growth
• Listed on a major exchange, such as the NYSE or the Nasdaq
• Generally a component of a reputable index, such as the S&P 500 or the FTSE
• Known for paying dividends to shareholders

Examples of blue-chip stocks

Here are a few examples of some of the most popular blue-chip stocks in the world:

Microsoft and Apple are strong blue chips because of their global popularity. The goods produced by these companies are used by hundreds of millions of people around the world, with both Microsoft and Apple owning decades of proven success in innovation.

Johnson & Johnson has been around for more than 100 years, continually proving it has the power to adapt to changing economic circumstances. The company’s wide range of popular consumer products gives it a diversified portfolio well-suited to blue-chip status.

Amazon is another solid example of a blue-chip growth stock. The e-commerce giant excelled during the massive rise in online shopping in 2020, as social isolation and health guidelines rerouted customers from brick-and-mortar stores to digital buys.

Why should you include blue chips in your portfolio?

Blue-chip stocks are often considered relatively stable investments, with a proven history of market success and steady growth. They are likely to have survived various market conditions, cycles and challenges. 

Companies with blue-chip stocks will often have a solid, steady history of paying dividends, but might not have the high jumps of growth stocks and are also unlikely to generate the same higher returns that potentially riskier investments might.

Generally, blue-chip stocks are a suitable foundation for any portfolio, but when it comes to investing, building a balanced portfolio is important. There are various ways to achieve this balance, including through the diversification of risk levels and the type of company invested in. 

For those with a higher risk tolerance, blue-chip stocks can provide a safe foundation enabling the pursuit of more potentially volatile investments.

At the same time, for more conservative investors who might want to take a lower-risk approach, blue-chip stocks can help to preserve and protect wealth while allowing investors to enjoy potential dividends.

Some investors wait for market crashes to load up on blue-chip companies at a perceived discount.

Blue-chip stocks that pay dividends

Dividends constitute one of the most appealing characteristics of blue-chip stocks, and are among the primary reasons a company is considered a blue-chip stock in the first place.

Companies with blue-chip stocks determine dividend payments after reviewing performance each quarter in earnings season. The company then announces how much the dividend will be and when it will be paid.

Some companies with blue-chip stocks are known not only for paying dividends year after year, but also for increasing their dividend payments annually. Some of the most popular examples of such companies are Exxon Mobile, Walgreens Boots Alliance and AT&T. It is important to remember, however, that past performance is not an indication of future results.

It is important to remember that paying dividends is not a requirement for companies, no matter how successful they are. Some companies cannot pay dividends because they don’t make enough profit. Others prefer to reinvest their profits back into their business, to make it bigger or better, acquire other organisations or even chip away at debts.

Don’t confuse safety with immunity

Blue-chip stocks are well-established companies with proven histories of growth, quality, and delivering solid dividends to their shareholders. 

While blue-chip stocks are considered to be safer than lower-level growth stocks and other riskier types of investments, as with any form of investment, investors should always explore strategies to reduce risk and implement blue-chip stocks as part of a wider, diversified portfolio.

Use the eToro Academy to learn about more stocks and how to trade them.

FAQs

Is Coca-Cola a blue-chip stock?

Coca-Cola is a blue-chip company. It is a household name with an internationally recognised product. Even during recessionary or high cost of living periods, Coca-Cola is unlikely to suffer significantly, as many people will drink its products regardless of the wider economic conditions.

Why are stocks called blue chips?

Blue-chip stocks get their name from the game of poker, where blue chips are often the most valuable chips in play. The term was first used to describe high-value stocks by Oliver Gingold, an employee of Dow Jones, in the 1920s.

Are cyclical stocks the same as blue-chip stocks?

No, cyclical stocks are not the same as blue-chip stocks. Cyclical stocks are associated with companies whose performance is closely tied to economic cycles, and often suffer during recessionary periods as consumer spending decreases. Blue-chip stocks are more stable investments, with a proven track record of surviving economic downturn.