- Blue chip companies are older, established firms with a low risk of failure.
- Blue chips can provide consistent returns through stock price appreciation and dividend payouts.
- Conservative investors like blue chips for their security and reliability, but risk-seeking investors may prefer stocks with higher potential returns.
- 5 stocks we like better than 3M
What is a blue chip company? When an asset is valuable and highly sought after, it might earn the term "blue chip." Consumers can label anything a blue chip, such as a painting from a renowned artist or a college football prospect with tremendous physical gifts.
However, the phrase "blue chip" was first coined to describe a type of stock or high-value company. The association came from poker. While most poker chips are white or red, the rarest and priciest ones were — and still are— blue. Corporate moguls caught onto this concept during an economic boom in 1923 when stocks became highly valuable commodities, and people adopted new terms such as "Black Tuesday" for days when stock prices plummeted drastically.
"Blue chip companies," then, are renowned businesses that demonstrate strong financial performance over long periods and have been industry leaders in their markets throughout their existence.
A blue-chip stock returns dividends, which is why many of the largest and most successful public companies also carry the moniker "blue chips."
Overview of blue-chip companies
So, exactly what are blue chips? The term "blue-chip stocks" entered market vocabulary in the 1920s thanks to investment writer Oliver Gingold, who worked at the predecessor to the Dow Jones company.
Like a poker player who wants to collect as many blue casino chips as possible, an investor looking for long-term gains will fill a portfolio with blue-chip companies. A blue chip firm is an industry leader recognized for its staying power, long-term profitability and ability to weather market downturns and recessions.
You're likely familiar with the Dow Jones Industrial Average (DJIA). It's the oldest of the three major indices used to track the performance of the U.S. stock market. Experts often call the DJIA the "blue-chip index" because it tracks a relatively small swath of the market but contains 30 large-cap blue-chip companies from various sectors and industries.
Characteristics of blue-chip companies
Blue-chip firms can be found in different industries and fields, both domestically and abroad. But when most investors talk about blue-chip companies, they reference large-cap American stocks. While there are no rigid criteria on what makes a company a blue chip, they all share a few common characteristics:
- Large market cap: A blue-chip company doesn't necessarily need to be a $500 billion behemoth, but having a large market capitalization figure is essential for stability and accessibility. Small and mid-cap companies usually aren't considered blue chips; a market cap of $10 billion or more is a common cutoff point.
- Easy to trade: Liquidity is another common feature of blue-chip companies. Blue chip stocks should be easy to find and not have high bid/ask spreads. One of the main benefits for institutional investors is the ability to buy large blocks of stock without paying high transaction fees. Blue chips usually trade millions of shares daily.
- History of success: One of the reasons the Dow Jones remains a heavily-tracked index is its focus on blue-chip stocks. The stocks in the Dow are blue chips in the most robust sense, many of which have 50 or more years of business success. Blue chips tend to be older companies in less growth-focused industries, although this rule has plenty of exceptions.
- Low volatility: Beta is a metric that measures a stock's volatility compared to the volatility of the overall market. A low-beta company has weaker price gyrations than the market. Blue-chip stocks frequently find themselves in this low-beta category. Low volatility can be a major perk for investors who want predictability in their stocks, but low volatility also tends to mean lower returns.
- Increasing dividend payouts: Not all blue-chip companies are dividend payers. A company like T-Mobile U.S. Inc. NASDAQ: TMUS meets all the standard criteria of a blue-chip stock but pays zero dividends. However, dividends are often a major component of blue-chip investing, and the companies that increase their dividends annually belong to a special group. For example, the Dividend Aristocrats are a group of large-cap companies in the S&P 500 that have raised their dividend payouts for 25 consecutive years.
Historical evolution of blue-chip corporations
The concept of blue-chip stocks has come a long way since the term was first coined in 1923. The number of American companies that meet all the criteria to make it onto (or into) an index like the Dow Jones or S&P 500 is relatively small; these are true industry leaders, often with decades of financial success and business innovation under their belts.
For example, Exxon Mobil Corporation NYSE: XOM is an iconic blue chip company that has withstood countless economic changes and market shifts. Founded over a century ago as Standard Oil Company, ExxonMobil’s original purpose was operating oil pipelines across state lines, and it eventually grew into a multinational oil and gas corporation. The company has a market cap of over $400 billion. ExxonMobil has consistently weathered market downturns and remains an industry leader.
Another example of a blue-chip company is Microsoft Corporation NASDAQ: MSFT, founded in 1975 by Bill Gates and Paul Allen. The company has grown into one of the most valuable and recognized brands worldwide, with a market cap of nearly $3 trillion. Microsoft’s dominance in the technology industry means it's remained at the forefront of innovation while providing stable returns for its investors.
Why invest in blue-chip companies?
Now that we've answered the question, "What are blue chip companies?", it shouldn't be too hard to understand why blue-chip investing is so popular. Raking in the highest possible gain isn't the goal for many investors. If you're young and will have plenty of time in the market, riskier investments like growth stocks or small caps make sense. These companies may have a higher risk of failure, but the rewards can be significant, and a long time horizon helps negate some risks.
Blue-chip companies don't have the promise of sky-high returns. After all, it's much easier for a small company to double its market cap than a large-cap Dow Jones component. But for retirees, institutions and other investors with a conservative slant, blue chips are a way to maintain market exposure and collect dividends without taking on too much risk. Blue chips have proven track records of capital preservation, which is why many investing strategies revolve around them.
Some common blue-chip investing techniques involve buying stocks near their 52-week lows or using dividend capture to reap the payouts without the exposure risk. But most blue-chip investors buy and hold these stocks for long periods, often decades or more. If you're looking for one of the more proven "set it and forget it" investment strategies, buying and holding blue-chip firms is a great place to start.
Examples of blue-chip companies
You can find blue-chip companies in every sector of the market. Here are a few examples from differing industries:
3M Company Inc.
3M Company Inc. NYSE: MMM is a member of the Dividend Aristocrats, one of the select companies with 25-plus years of annual dividend payout increases. A member of the DJIA and S&P 500 indices, 3M has a market cap of $60 billion and operates in various industries.
Most investors know 3M for its consumer products like adhesives, home improvement and first aid supplies. If you've ever tried to mount a picture frame on a wall, you've likely used a 3M product. The company has built its reputation as a diamond-in-the-rough stock over the years, and they've been willing to invest in new technologies even while struggling.
Operational agility is key for any business, but it's especially important for blue chips like 3M that need to remain adaptable within changing business landscapes. 3M’s research & development team is constantly innovating products – from home décor solutions and medical supplies to energy technology – so it remains competitive in more than one industry sector at once . The broad product mix allows them not only to stay relevant but also to put their profits toward growth opportunities across the economy.
UnitedHealth Group Inc.
UnitedHealth Group Inc. NYSE: UNH is one of the largest healthcare companies in the world. Operating in hospitals, home care, government, life sciences and pharmacy services, UnitedHealth has its hands in many healthcare systems across the United States.
With a market capitalization of over $300 billion, UnitedHealth dominates the healthcare industry and has been able to remain successful despite changing healthcare laws and economic conditions. Its corporate strategy centers on providing Medicare programs, offering coverage, investing heavily in technology like artificial intelligence solutions, and maintaining rigorous cost reduction strategies to stay competitive.
The company is also assessing new markets opening up due to telemedicine alongside regulatory changes brought by health plans. These initiatives have allowed UnitedHealth Group to become an even greater leader within its sector – it's often referred to as a bellwether for the industry.
Apple Inc. NASDAQ: AAPL is a unique member of the DJIA. While indeed not the oldest member of the blue-chip index, it's now the largest by market cap and one of the most notable companies in the entire world.
Apple isn't your typical blue chip — it pays a small dividend, shares many similarities with growth stocks and sells electronics and tech. But as the King Blue Chip of this era, Apple's lessons still apply to blue-chip investing overall.
Apple is proof that a company can remain profitable and dominate its respective market by innovating products, focusing on customer service and keeping up with (or ahead) of changing trends in consumer tech. It can smartly leverage investment capital against potential growth opportunities. That focus on agility has served the company well – it now has a massive portfolio of patents, paving the way for new inventions like its Vision Pro augmented/virtual reality technology.
Identifying blue-chip companies
An easy way to find a list of blue-chip stocks is by checking out MarketBeat's list of the best blue-chip stocks. However, you may be like many investors who enjoy unearthing your own stocks. To recognize a blue-chip company, start by evaluating its financials and its history of success within its industry. You should consider both short-term gains as well as long-term sustainability.
Here are some key areas to examine:
- Financials: Financial statements provide insight into the health of the company. Evaluate factors such as return on equity (ROE), debt/equity ratio, liquidity ratios etc.. Look out for consistent growth over time or any negative trends that could suggest an impending decline in the company’s financial health.
- Industry position: A blue-chip company should be a leader in its industry, with a significant market share and a proven track record. Look for companies with consistent earnings growth over several years. Assessing a company's market position is also key — consider whether its products are still popular with customers or if competitors have been encroaching.
- History of dividends: A blue-chip company has a history of paying out regular dividends to its shareholders. Dividend increases or stability over several years is a good sign that the company is stable and profitable.
- Management quality: The leadership and management of a blue-chip company should be experienced, competent and focused on long-term growth strategies.
- Innovation: Companies must innovate to remain relevant and competitive in today's ever-changing business environment. A blue-chip company should have a proven track record of adapting to change.
Pros and cons of blue-chip investing
Investors deciding on whether to include blue-chip stocks as part of their investing strategy should weigh the following pros and cons:
The pros include:
- Predictability: Blue-chip stocks have low volatility and usually provide consistent income through dividends. Investors like retirees on a fixed income need consistency and reliability, not market-smashing outperformance. Blue chips are some of the safest equities you can buy.
- Low risk of large losses: While blue chip bankruptcy isn't unheard of (think Lehman Brothers and Chrysler), it is rare. Companies like JPMorgan Chase & Co. NYSE: JPM, Colgate-Palmolive Company NYSE: CL and Cigna Corporation NYSE: CI have been around for more than 200 years! These are stocks that many investors hold for life and then pass down to heirs.
- Range of industries and sectors: Every industry has leaders; you can find blue chips in all market corners. Investing in blue chips is an excellent way to build a diverse stock portfolio.
The cons include:
- May underperform growth-oriented peers: Reliability is important, but investors looking for outperformance may prefer minimal exposure to blue chips, especially during bull markets that reward risk-taking.
- Dividends can be tax-inefficient: Be sure to understand the tax status of all your dividends, especially if holding these stocks in a taxable account. Some dividends are unqualified if specific holding periods aren't met, and unqualified dividends are taxed at your current income level.
- Cannot eliminate risk: Blue chips might be safe compared to growth stocks, but no security can escape market risk, and even the best blue chips will lose value in a bear market. The goal of blue-chip investing isn't to prevent losses but to minimize them in a downturn.
Blue-chip company investing vs. alternative strategies
Investing in blue-chip companies is typically a buy-and-hold strategy. Blue chips comprise most Americans' retirement portfolios, whether through direct equity, ETFs and mutual funds, or target date funds. But blue-chip investing is a slow process meant to preserve capital and build wealth over time. If you have a high risk tolerance or short time horizons, you might want to consider some alternatives, such as:
- Day trading: Day trading means using technical indicators to buy and sell stocks in a single trading session. You hold no positions overnight, and gains are incremental.
- Swing trading: A combination of technical analysis, fundamentals and potential catalysts are employed to buy and sell stocks quickly. You may hold positions for several weeks or months or as short as a single night.
- Growth investing: The opposite of blue-chip stocks would be risky growth stocks, which offer the potential for high returns and the risk of substantial losses. Growth stocks tend to be smaller companies focused on the tech or pharmaceutical industries, but growth stocks can also be large companies like Alphabet Inc. NASDAQ: GOOG and Netflix Inc. NASDAQ: NFLX.
Blue chips: Safe but unspectacular
Large, dividend-paying companies aren't the best choice for every investor. If you have a long time horizon or a strong risk tolerance, something other than blue-chip investing might fit your desired goals.
But if you have a low risk tolerance or simply find investing in best-of-class companies appealing, blue-chip stocks are a sound choice to protect your capital while still notching some capital gains.
That's why blue-chip stocks are a safe, but unspectacular, asset class amongst retirees, savers and institutional investors. They offer these investors reliability and staying power. Many blue chips can boast a century or more of successful business practice, and their stockholders receive steady gains.
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