Blue chip stocks represent well-established companies with a proven track record of long-term success. These companies are typically large and prominent leaders in their industry, often with a significant consumer-facing presence. This means you might recognize the company from its products or services, making it both familiar and a potential investment opportunity.

Blue chip stock definition: What it means if a company is blue chip

Blue chip stocks are typically the most dominant companies in their industries, but there is no official list or formal authority that designates which companies earn the blue chip label.

However, blue chip stocks generally share several key characteristics:

  • Sustained Success: Blue chip companies have a proven track record of long-term success. Their stock prices typically show steady appreciation over time, reflecting their ability to generate consistent profits despite economic fluctuations, leadership changes, and technological disruptions.
  • Significant Size: Companies with sustained profitability often achieve substantial market capitalization. Blue chip stocks usually have “mega” market caps, often $200 billion or higher.
  • Dividend Payments: Most blue chip stocks provide regular dividends to their investors. While there are exceptions, many of these companies reward long-term investors with a consistent and generally increasing stream of dividend payments over the years.

These traits make blue chip stocks attractive to investors. However, identifying blue chip stocks can be subjective. For example, many sports stars who were once considered “blue chip” before going pro did not all live up to their potential due to injuries or other issues.

In investing, a company might fit the blue chip profile for a time but later decline. For instance, Kodak was a leading name in photography before it filed for bankruptcy in 2012. Although Kodak has since re-emerged, it no longer holds the same level of dominance. Similarly, Sears, once a retail pioneer, has seen most of its stores close and its stock drop significantly. This illustrates that the blue chip designation is not permanent and companies can fall from their prestigious status.

Examples of blue chip stocks

This list is not exhaustive but serves to illustrate that blue chip stocks can be found across various industries.

Here are some examples of well-known blue chip stocks:

  • Apple
  • Coca-Cola
  • Home Depot
  • IBM
  • Amazon
  • Bank of America
  • Johnson & Johnson
  • Microsoft
  • McDonald’s
  • Procter & Gamble
  • Walmart

Should you invest in blue chip stocks?

Despite examples like Kodak and Sears, blue chip stocks can still form the foundation of a strong investment portfolio. While some blue chip companies are in high-growth phases, many are well-established and mature. Even the slower-growing ones can be appealing long-term investments, partly due to the dividends they often provide.

If you’re evaluating whether to invest in blue chip stocks, keep in mind that you might already be investing in them. Broad-based index funds typically include many of the stocks considered blue chip, so you might already own a portion of these established companies.

Alternatives to blue chip stocks

If you’re new to investing and considering purchasing individual blue chip stocks, you might want to think about investing in a broader, diversified index instead. For example, the S&P 500 includes major blue chip companies while also featuring a wide array of other profitable and growing firms. Investing in such a diversified index reduces the risk associated with individual blue chip stocks potentially faltering, similar to what happened with Sears.

Broader index funds, like the Russell 1000, include prominent companies such as Amazon, Apple, and JPMorgan, as well as mid-cap firms that are growing rapidly but may be riskier investments. These index funds offer essential diversification. By investing in a broad index, your money benefits from a wide range of businesses across different market segments, rather than relying solely on one or two major companies.

In Conclusion

Although blue chip stocks are often considered stable and reliable investments, it’s crucial to remember that even these well-established companies can encounter difficulties, as seen with Kodak and Sears. Being classified as a blue chip stock doesn’t ensure long-term success. Nevertheless, blue chip stocks can be a valuable part of a diversified portfolio. To manage risk effectively, it’s important to conduct thorough research and consider alternatives, such as broad-based index funds, to avoid over-reliance on a few individual stocks.