Explaining blue chip stocks
The name of these types of stocks is derived from Poker. In Poker, the blue chips are of the highest value. Much like them, blue chip stocks are also known for having a high value, as well as huge market capitalization.
Although there is no strict or official definition of blue chip stocks, there are several things that most of them have in common:
- They are huge companies with a long, successful history
- Are leaders of their respected industries and are regarded as household names
- Have market capitalization in billions of dollars
- Have a history of paying dividends
That said, not all of the blue chip stocks are the same. For example, dividend payments
are not necessarily a defining factor for blue chip stocks. However, there are many dividend blue chip stocks known for having a long record of paying stable or even rising dividends.
There also is not really a clear and one rule that states how much a company should be worth to be seen as a blue chip. While there are some that claim the company should be worth at least $10 billion, there are also others that say a company worth $5 billion can also be called a blue chip stock.
Top blue chip stocks - Some examples
There are many well-known blue chip stocks around the world. A great example could be Coca-Cola, which is a huge name around the world. Employing more than 700,000 people, this giant company is worth more than $229 billion.
Initially created as an online book-seller, Amazon is another famous blue chip, now selling mostly anything. Amazon today is worth as much as $1 trillion, making it a perfect fit in the blue chip stocks list.
Created in 1972, another great example of a blue chip is Microsoft. This company represents one of the largest corporations in the history of business. The market cap of the company is as much as $1.5 trillion, making it one of the 3 largest companies globally.
Among the 2021 blue chip stocks list also is Johnson & Johnson, which is a well-known company known for products such as baby shampoo, Band-Aids, and Tylenol among others. This giant pharmaceutical company has been around for many years and proved to be a successful and stable blue stock.
There are tens of other blue chip companies globally, known for their stability and dominance on the market.
Not every large company is a blue chip
While talking about the blue chip stocks list to buy, it should be noted that just because a company is large, it does not mean that it can be considered a blue chip stock. There are many companies with a huge market cap and promising future, however, many of them lack the proven history and stability required to be considered a blue chip stock.
The thing about blue-chip stocks is that they don't really refer to stocks with a high price tag, but rather, to stocks that demonstrate a reliable history of stable growth. They also tend to be a component of the most reputable market indexes, such as the Dow Jones Industrial Average, The Standard & Poor's 500, the Nasdaq-100, and many others.
Advantages of investing in blue chip stocks
While looking for the best blue chip stocks to invest in, traders are looking for companies with proven success. One of the biggest advantages of blue chip companies is their stability and steady nature.
Because of this, many traders view them as 'safe-haven' assets. Even during the crisis, most of such companies are hardly affected, and even if they are affected, they are one of the first to recover.
Another advantage that most of the blue chip stocks have is that they are paying dividends. A dividend is a portion of a company's profits, which is distributed to shareholders. In most cases, smaller companies prefer to retain their earnings and invest them in their future growth.
On the other hand, blue chip companies do not have the need to invest in their future growth as much, because of this, there are many high dividend blue chip stocks. Also, another advantage of blue chip stocks is that they are less volatile.
These companies have a strong financial situation, which helps them better survive ongoing events around the world. While smaller company shares are more likely to experience frequent and drastic price movements, blue chip stocks tend to be more stable.
Blue chip stocks are also known for generating higher returns. It is largely believed that such companies can have returns of as much as 8-12% annually when you reinvest the dividends.
Blue chip stocks explained - Drawbacks
While there are many benefits and advantages of blue chip stocks, they also come with some disadvantages. While it is true that blue chip stocks generally tend to stand stronger during crises, safety is not guaranteed.
For example, during the 2008 global financial crisis, several blue chip companies went bankrupt, while many others faced a lot of challenges during the Covid-19 pandemic
While discussing blue chip companies on the stock market and their disadvantages, it should be noted that they mostly come with moderate growth potential. Because blue chip stocks are already huge and successful companies, there is very limited room for growth.
These companies also are more likely to focus on dividends rather than growth. If you are an investor looking for opportunities to build capital as fast as possible, growth stocks are more likely to help you achieve your goals faster. These growth stocks mostly tend to be smaller companies.
Another disadvantage of only focusing on blue chip stocks is the limited choice that you are presented with. While there are thousands of stocks traded in the US, there are about 100 blue chip stocks. This makes you ignore many other companies that might have huge growth potential.