Maybe you are a younger investor ready and willing to take a few more risks with your stock trading. Or perhaps you are nearing or well and truly into your retirement, and want a solid, safer way to invest. Regardless of your age or investment style, blue chip stocks can play a huge role in helping you build a well-rounded — and successful — 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?
The most common blue chip stock definition includes companies that share some combination of the following characteristics:
- Well-established and often a household name
- Good reputation
- Strong financial situation
- Stable earnings foundation
- Successful, often at or near the top of its respective industry
- Known for paying dividends to shareholders
Blue chip growth stocks are often considered an alternative to riskier, less established growth stocks. However, that does not mean one is better than the other. People who like to take more risks in their investments might choose to chase growth stock dividends with more variance, which can sometimes have a better possibility of paying off quickly. On the other hand, 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. People will often hold on to these capital gains stocks for a long time, as they are optimal for long-term investors.
The name comes from the gambling world of decades past, where blue chips were the most valuable.
Why should you include blue chips in your portfolio?
When it comes to getting started with online investing, one of your biggest considerations should be building a balanced portfolio. This balance can come in a variety of ways, including risk levels and the types of companies and markets in which you invest. Blue chip stocks can play a big role in helping you achieve this balance.
This is true regardless of your overall investment strategy. For those in a position to take a few more risks with their portfolio, such as younger investors who have many more years of employability left ahead of them, blue chip stocks can provide a safe foundation enabling the pursuit of more potentially volatile investments. At the same time, older traders who do not have the same earning potential in the workforce might want to take a lower-risk approach to trading. Blue chip stocks can help preserve and protect wealth while still allowing traders to enjoy potential dividends.
Blue chip stocks that pay dividends
As mentioned above, dividends constitute the most appealing characteristics of blue chip stocks — and are among the primary reasons something can be considered a blue chip stock in the first place. When a company does well and experiences some success, it often shares out the resulting profits in the form of distributing dividends to shareholders.
Companies with blue chip stocks determine dividend payments after reviewing performance each quarter. The company then announces how much the dividend is going to be and when it will be paid. They also announce something called a record date. Whoever owns shares on that day is the one who receives the dividend. So, if you own shares on the record date, but sell them before the day on which the dividend is paid, you will still receive the dividend.
It is important to remember that paying dividends is not a requirement for companies, no matter how successful they are. Some companies, of course, cannot do so, because they don’t make enough profit. Others prefer to put their profits back into their business instead, to make it bigger or better, use it to acquire other organisations or even chip away at debts. All of these actions can lead to dividends down the line. One hallmark of really strong blue chip stocks is that they try to do all of these things — they pay dividends while also putting money back into their business.
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 (XOM), Walgreens Boots Alliance (WBA) and AT&T Inc. (T). These can provide a fairly reliable stream of income for investors, as opposed to the potential ups and downs of other shares and investments.
Examples of blue chip stocks
Here are a few examples of some of the most popular blue chip stocks in the world:
Microsoft (MSFT) and Apple (AAPL) are strong blue chips because of their global popularity. The tech of these companies is used by hundreds of millions of people around the world, with both Microsoft and Apple owning decades of proven success in innovation.
Johnson & Johnson (JNJ) has been around for more than 110 years, continually proving it has the power to adapt to changing economic circumstances and overcoming dozens of recessions. Its standing in both the health industry and its huge range of popular consumer products give it a diversified portfolio that is well suited for blue chip status.
Amazon (AMZN) 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 re-routed customers from brick-and-mortar stores to digital buys. Amazon is firmly entrenched, with a market capitalisation of well over $800 billion.
Don’t confuse safety with immunity
So, are blue chip stocks safe? Yes and no. While blue chip stocks are considered to be safer than lower-level growth stocks and other riskier types of investments, it can be a mistake to say anything is “safe” when it comes to the investment world. There is no such thing as a sure thing when it comes to trading.
One example is when an industry titan such as General Motors is forced to declare bankruptcy in the face of huge economic downturns or depressions. While blue chip companies are generally less prone to these types of catastrophes, it is important to remember they can still fail.
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This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.