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What is Blue Chip Stocks?
Blue Chip Stocks are stocks of companies which are leading in its sector and are famous at the national level having a record of giving continuous dividend payments and other strong investment qualities. These are giant companies with rock-solid reputations like General Electric (GE), Intel, Visa, Wal-Mart, Coca-Cola Co., and IBM Corp., Apple, Walt Disney, Mc Donald’s, Goldman Sachs, Johnson & Johnson etc. These stocks are financially sound with a track record of dependable earnings and which pays additional income to the investors in the form of dividends.
- Blue chip stocks as per legend are named after the highest value chips used in the game of poker.
- This stocks are usually the market leader or come in the top three companies in its sector and are very well known and also have the market capitalization in billions.
- They have a long history of paying blue chip stocks with high dividends to its investors.
- Ben Graham in his book The Intelligent Investor has written that an investor should look for a company which has been giving its investors dividends for twenty years or more. This thought gives us an idea of how a such stocks should be.
List of Blue Chip Stock
A lot of blue chip stocks are listed in the US stock exchange. These stocks are generally sector leaders and are stable companies. These stocks are less volatile and offer stability to a portfolio. Few examples of blue chip stocks listed in NYSE are Verizon communication, Unilever, 3M Co., Union Pacific Corp, Texas Instruments Inc., Lowe’s Companies Inc., Starbucks Corp, Simon Property Group, Illinois Tool Work Inc. A number of websites provide screener to screen stocks based on various parameters, searching blue chip stocks is one of them.
Below is the screenshot of one such example of blue chip stocks.
Features of Blue Chip Stock
Though paying the dividend is not a mandatory rule for a stock to be the blue chip but most of these stocks have a strong past record of paying stable and rising dividends. Such stock is usually a part of the most well-known market indexes or averages like the Dow Jones Industrial Average, the Standard & Poor’s 500 (S&P) and NASDAQ 100 in the US, the TSX-60 in Canada or the FTSE index in the United Kingdom.
With the list of blue chip stocks changes in the Dow Jones Industrial Average index (DJIA), the accompanying list of blue chip stocks changes. Though there are no set rules or public parameters stating how stocks are added or removed from DJIA but it is known that a stock is added only if such stocks companies have an excellent reputation, shows sustained growth and has an interesting appeal to a large number of investors. The same rule is applied to the other mentioned indexes. These are the stocks that give superior returns in the long run.
The most important parameters used to identify these stocks are consistent annual revenue over a long time period, stable debt to equity ratio, average return on equity (ROE) and interest coverage ratio along with market capitalization and price to earnings ratio (PE ratio).
Some of the examples of blue chip stocks in India are State Bank of India (SBI), Tata Consultancy Services (TCS), and Reliance Industries, ONGC, ITC, Sun Pharma, Infosys, HDFC Bank etc. They are famous for their capability to endure tough market conditions and give high returns when the market conditions are favorable.
Benefits of Investing in Blue Chip Stock
- They have highly valued most favorable long-term investment options. They have a history of showing growth in long-term portfolios and they are of reputed companies which are household names.
- It is known to most of the investors that these stocks have stable earnings so in times of economic distress investors consider these as the safe choice because of their secure nature.
- They give a sense of security during the times when the growth of the economy is slow since such companies have strong management teams and they have the ability to churn out profits.
- If the stock market is undergoing a bear market condition then the investors have no need to worry regarding investments because such companies recover. Since they have a stable price without many fluctuations, they offer blue chip stocks with high dividends to make up for it.
- It can be seen that they give increased and uninterrupted dividend payments over time. So, in the long run, the investors can actually benefit from the dividends given and can think of generating portfolio income. These dividend payments also help in protecting the investors from the adverse effects of inflation.
- These companies which fall under the blue chip category have the strong balance sheet and cash flows, good business models, and a strong consistent growth. For these reasons, many investors consider blue chip a safe investment option. Investors who plan to invest long term can consider blue chip stocks as an investment choice as they grow steadily with time and also offer blue chip stocks with high dividends.
Though it is known that blue chip stocks are the safe option for investment as they have the capability to survive several challenges and tough market cycles this may not be the case every time. During the global recession of 2008 though JP Morgan Chase survived the tough market conditions, General Motors and Lehman Brother along with a number of leading European banks considered to be blue chip went bankrupt which is a proof that even best blue chip stocks companies also undergo struggle during the times of extreme challenges.
Though blue chip stocks should consist of a larger part of the portfolio it should not be the entire portfolio. A portfolio should be having diverse components like bonds and cash along with blue chip stocks, mid caps and small caps. Investing in only such stock may give an investor the label of boring and outdated but investors with sound knowledge always opt for rock-solid stocks which have a proven track record of good performance even in turbulent times and a history of paying regular dividends. So going by these criteria blue chip stocks are definitely the secured choice. These stocks have given enough proof of security so that investors prefer those in times of inflation and deflation and good and bad times.
This has been a guide to what is Blue Chip Stocks? Here we discuss the list of Blue chip Stocks along with examples and their features. In addition, we discuss the benefits of investing in Blue Chips. You can learn more about Equity Research from the following articles –