Done right, investing has little in common with gambling. But the term “blue-chip stock” does borrow from poker.
While there is no formal definition of a blue-chip stock, these companies are known for being valuable, stable and established. They’re typically big names — often household names — in their industries, and investors count on them for their reliability.
Here’s what you need to know about blue-chip stocks.
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What makes a stock a blue chip?
Think of a blue-chip stock as a stock you would bring home to meet your parents: It makes a good impression and has the substance to back it up. It’s stable, responsible and reliable.
Blue-chip companies have proven themselves in good times and bad, and the stocks have a history of solid performance. Stocks that are considered blue-chip stocks generally have these things in common:
Large market capitalization. Market cap is a measure of the size and value of a company. Blue-chip stocks are often large-cap stocks, which typically means they have a market valuation of $10 billion or more.
Growth history. Blue-chips have a reliable, solid history of sustained growth and good future prospects. They might not be flashy like fast-growing tech stocks, but that’s because they’re already established.
Component of a market index. Blue-chip stocks are in major market indexes like the S&P 500, the Dow Jones Industrial Average and/or the Nasdaq 100.
Dividends. Not all blue-chip stocks pay dividends, but many do. Dividends are regular payments made to investors from a company’s revenue. Companies that pay dividends are often mature, which means they may no longer need to invest as much revenue back into their growth. (Interested in dividends? View our list of 25 high-dividend stocks.)
Why invest in blue-chip stocks
No one type of stock should make up the bulk of your portfolio. Diversification, as always, is key when investing, even if you’re investing in companies that are widely considered rock-solid.
“Blue-chip stocks are popular among investors because of their reliability. ”
Diversifying requires spreading your money around among many types of companies. That means including companies with small, mid and large market capitalizations, as well as companies from various industries and geographic locations. (Learn more about the types of stocks you can invest in.)
However, blue-chips are popular among investors, especially older or more risk-averse investors, because of their reliability. That doesn’t mean they’re immune to market downturns, but it does mean they’ve shown a history of weathering these storms and bouncing back.
Investors also appreciate the dividends blue-chip stocks typically pay. Dividends are especially attractive if you’re investing for income, as many investors do in retirement. Blue-chip stocks tend to pay reliable, growing dividends.
» Learn more: How to buy stocks
List of blue-chip stocks
As noted above, blue-chip stocks are generally, but not always, household names. Here’s a list of blue-chip stocks you might recognize. Note that this list does not include every blue-chip stock; it is just intended to be a sample.
» Looking for stock research? Read our review of Morningstar
An alternative: Blue-chip funds
Whether you’re buying blue-chip stocks or not, building a portfolio out of individual stocks takes time and research.
That’s why many investors turn to low-cost index funds or exchange-traded funds instead. These funds contain a curated collection of investments and allow you to purchase a large selection of stocks in one transaction. It’s easy and instant diversification — at least, of course, among blue-chip companies.
Index funds and ETFs track an index, which is a specific segment of the stock market. Since blue-chip stocks typically have large market caps, a large-cap index fund or ETF is a good way to get exposure to these companies. You can also buy a fund that tracks the S&P 500 or the Dow Jones Industrial Average since both include blue-chip stocks. Here’s more on how to invest in index funds.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.