A blue chip is a nationally or internationally recognized, well-established, and financially sound company that is publicly traded. Blue chips generally sell high-quality, widely accepted products and services.
Blue chip companies have reputable brands that have been built and maintained over many years. That and the fact that they have weathered multiple downturns in the economy make them stable companies to have in a portfolio.
Blue chip companies operate profitably despite adverse economic conditions, which helps to contribute to their long records of stable and reliable growth.
Examples of Blue Chip Stocks
A blue chip company can be a multinational firm that has operated successfully for a number of years, is a dominant leader in its industry, and is widely recognized.
Some examples include:
- Berkshire Hathaway
- UnitedHealth Group
- Proctor & Gamble
Characteristics of Blue Chip Stocks
- Blue chip stocks are seen as less volatile investments than shares in companies without blue chip status because of their noteworthy institutional profile and longstanding financial health.
- Blue chips are highly liquid since they are frequently traded in the market by individual and institutional investors alike. Therefore, investors who need cash can feel confident that there will be buyers for their shares.
- Blue chip companies are also characterized as having little to no debt, large market capitalization, stable debt-to-equity ratio, and high return on equity (ROE) and return on assets (ROA).
- Solid balance sheet fundamentals and high liquidity have earned blue chip stocks an investment-grade credit rating.
- While dividend payments are not necessary for a stock to be considered a blue chip, most blue chips have long records of paying stable or rising dividends.
- An investor can track the performance of blue-chip stocks through a blue-chip index, which can also be seen as an indicator of industry or economic performance.
Blue Chips As Safe Investments
Over the years, a blue chip company will have survived financial challenges and complicated market cycles. It will have turned in a steady return and typically paid dividends year in and year out. As a result, it can be perceived as a safe investment.
However, this doesn’t make it bulletproof. The bankruptcies of General Motors and Lehman Brothers, as well as a number of leading European banks, during the global recession of 2007-2009 show that even the best companies may struggle during periods of extreme stress.4
Blue chip stocks can be appropriate for the core holdings of a large portfolio. But they shouldn’t be the only investments. A diversified portfolio usually has some allocation of bonds, cash, and stocks. Moreover, a portfolio’s allocation to stocks can be diversified among large-caps, mid-caps, and small-caps, as well as domestic and international stocks.
Younger investors can generally tolerate the risk of having a larger percentage of their portfolios in growth stocks (which include some blue chips) because they have years to invest and recover from market mishaps. Older investors may focus more on capital preservation by putting a larger percentage of their investments in bonds and cash.