Blue Chip Stocks

Blue Chip Stocks Definition

Blue-chip stocks refer to the stock of large stable companies having market capitalization in billions that provide a good return on stocks, may provide dividends, have less risk and are considered to be safe investments. Examples of such stocks include Coca-Cola ltd, IBM Corp, Boeing Co., PepsiCo, General Electric (GE), Intel, Visa, Wal-Mart, IBM Corp, Apple, Walt Disney, Mc Donald’s, Goldman Sachs, Johnson & Johnson, etc

Explanation

Blue-chip stocks, as per legend, are named after the highest value chips used in the game of poker. These 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 high dividends to its investors.

Ben Graham, in his book The Intelligent Investor, has written that

an investor should look for a company that has been giving its investors dividends for twenty years or more. This thought gives us an idea of how such stocks should be.

List of Blue Chip Stock

There are lots of 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. A 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.

Below is the screenshot of one such example of such stocks.

Blue Chip Stocks

Features

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.

As the list of blue-chip stocks changes in the Dow Jones Industrial Average index (DJIA), the accompanying list of stocks changes. Though there are no set rules or public parameters stating how stocks are added or removed from DJIA, 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 ratioStable Debt To Equity RatioThe debt to equity ratio is a representation of the company's capital structure that determines the proportion of external liabilities to the shareholders' equity. It helps the investors determine the organization's leverage position and risk level. read more, the average return on equity (ROE), and interest coverage ratioInterest Coverage RatioThe interest coverage ratio indicates how many times a company's current earnings before interest and taxes can be used to pay interest on its outstanding debt. It can be used to determine a company's liquidity position by evaluating how easily it can pay interest on its outstanding debt.read more along with market capitalization and price to earnings ratioPrice To Earnings RatioThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more (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 the 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, investors can actually benefit from the dividends given and can think of generating portfolio income. These dividend payments also help in protecting investors from the adverse effects of inflation.
  • These companies which fall under the blue-chip category have a strong balance sheet and cash flows, good business models, and robust, 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 high dividends.

Though it is known that these 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 recessionGlobal RecessionGlobal recession refers to a condition when the countries across the globe experience an economic downturn for an extended period. It is a form of synchronized economic downfall encountered by the various interrelated economies throughout the world.read more 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 proof that even the best stocks also undergo struggle during the times of extreme challenges.

Conclusion

Though it should be 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. Still, investors with sound knowledge always opt for rock-solid stocks that 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 deflationDeflationDeflation is a decrease in the prices of goods and services caused by negative inflation (below 0%). It usually results in increased consumer purchasing power, owing to a simple supply and demand rule in which excess supply leads to lower prices.read more and good and bad times.

Blue Chip Stocks Video

 

This article 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 and benefits of investing in such stocks. You can learn more about Equity Research from the following articles –

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