Investing > Blue-Chip Stocks Explained

Blue-Chip Stocks Explained

Long-term investment in blue-chip stocks can generate passive income—and a financially secure future.

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Updated March 08, 2021

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Situation: You need to cross one of two bridges.

The first looks very sturdy, new, well-supported, and trustworthy—it’s just a little long. The second is much shorter, but doesn’t look nearly as strong. It might be safe—but it also might collapse.

Which bridge are you taking?

If you said the first bridge, then you already understand the benefits of blue-chip stocks. They’re regarded as the safest stocks you can find, though it might take some time to earn a decent return. ✅

Most people don’t consider investing in blue-chip stocks because they assume it is too expensive, but now might be the time to consider it. Although the pandemic has had disproportionate impacts across the board, many economists believe the blue-chip indices record high will be followed by a downturn, meaning you can buy undervalued blue-chip stock. Cha-Ching! 

Maybe you think blue-chip stocks are not as alluring as day trading, but it is a great way to compound assets until you retire. And who doesn’t want to be a silver-haired retiree with a sweet passive income? If you don’t invest or postpone investing, you’re gonna one day find yourself staring into your applesauce dreaming about all those dividends you didn’t compound. 

Ready to learn all you need to know? Let’s get to it!

What you’ll learn
  • What is a Blue-Chip Stock?
  • Blue-Chip Criteria Explained
  • Are Blue-Chip Stocks for You?
  • Pros and Cons of Blue-Chip Stocks
  • Blue-Chip Stock Dividends
  • Buying Blue-Chip Stocks
  • Foreign Blue-Chip Stocks
  • Blue-Chip Stock Funds
  • Measuring Performance
  • Blue-Chip Stocks in a Recession

What is a Blue-Chip Stock? 🔎

Some people think blue-chip stocks are boring because they are low-risk investments, but what they don’t know is that these stocks got their name from the blue chip used in poker, which is the chip with the highest value. In other words, if an investor goes all-in on blue chips, after ten years, they will likely have a winning hand. 

Blue-chip stocks are issued by large, stable companies that profit year after year, so investing in these companies is like having pocket aces. Although these stocks typically grow slowly, shareholders are compensated with dividends. Think of dividend payments as hush money the underlying company pays shareholders to keep quiet about the size of their growth and to focus on their substantial market cap.

Although blue-chip stocks traditionally had higher returns than bonds, this is not always the case. In February 2021, bonds’ 10-year rate surpassed stock dividend yield, which is partly due to companies not increasing their dividends during the COVID-19 pandemic. The leap in the bond yield caused the Dow to fall more than 400 points

It might also be interesting to note that market volatility and the growing popularity of cryptos has many people investing in “blue-chip coins.” Some investors are also turning to cryptos instead of bonds. 

Blue-Chip Criteria Explained 🔵

It is easy to spot the blue-chip starlets: Amazon, Apple, Berkshire Hathaway, Coca-Cola, Microsoft, Starbucks, etc. But it is important to know how to dividend invest and to be able to spot the blue chips that stay out of the spotlight.

In the 1988 classic Dividend’s Don’t Lie: Finding Value in Blue-Chip Stocks, “the Grande Dame of Dividends” Geraldine Weiss and Investment Professor Janet Lowe explain the characteristics of a blue-chip company:

1. Five dividend raises in 12 years: Not only does increasing dividends show a company likes to share their wealth with shareholders, but it also shows the company is well-managed and can perform over time. In other words, blue-chip companies are like the unicorn who, in Through the Looking Glass, tells Alice, “If you believe in me, I’ll believe in you.” 

2. Large market cap: A large market cap signifies good liquidity and makes it difficult for investors with a lot of shares to manipulate the stock price. Recent events, however, have shown how even individual investors greatly influence the market

3. 80+ institutions hold the stock: As much as we’d like to say fudge institutions, they dominate the market. As the saying goes, if you can’t beat them, invest in them.  

Institutional investment managers—those who manage the portfolios of banks, mutual funds, retirement plans, and the like—have a responsibility to ensure the portfolio includes high-quality stocks. While there is no doubt a rookie investor can get a finance degree on YouTube, knowing what stocks the institutions are investing in helps. 

Blue chips with the greatest price stability are those in which at least 80 institutions own half the outstanding shares. As the Grand Dame says, “There is safety in diversity.”

4. At least 7 of the most recent 12 years have improved earnings: Since investing in a blue chip is kind of like marrying a stock, investors want to be sure it will perform in better and worse economies. Sure, there will be some corrections in certain years, but investors want to be sure the blue chip is worthy of their long commitment. 

5. 25+ consecutive years of dividends: There are plenty of blue-chip companies to invest in that are not even 25 years old, but, in general, the older and more stable companies have been paying dividends for much longer than 25 years. Stanley Black & Decker has paid dividends for 145 years and has increased its dividends every year since 1968. Who wouldn’t want to compound that?

6. A Standard & Poor’s ranking of “A” or higher: When buying stock, it is okay to be a gold-digger. The S&P grading system is similar to a credit score in that a score indicates how well a company can meet its financial obligations. 

Are Blue-Chip Stocks a Good Investment? 💰

Investing in blue-chip stocks is great because it is like getting a twofer. Not only do investors reap the rewards of a passive income, but they also earn the added value of the shares when they decide to sell.

With that being said, there are certainly both pros and cons here.

Benefits and Drawback of Investing in Blue-Chip Stocks 

Blue chips are expensive and don’t grow as quickly as growth stocks. It’s also hard to catch them while they’re undervalued because they are very popular.

Since blue chips are always in the public eye, everyone and their dog wants to buy the moment they are undervalued or make an announcement to increase their valuation. This is why it is important to learn how to discover undervalued stocks

Pros

  • Less Volatile than growth stocks
  • Two ways to earn value: dividends and shares

Cons

  • Expensive
  • Hard to buy at optimal price

Blue-Chip Stock Dividends 💸

Since most blue-chip companies have stocks that pay good dividends, it is important for investors to decide how to use their dividends. If an investor’s initial investment is substantial, they can go ahead and quit their job and enjoy the luxury of a passive income. Otherwise, they’ll need to keep their job and invest little by little over time.

Some companies offer a dividend reinvestment plan, or DRIP. These programs enable shareholders to automatically use their dividends to purchase additional shares. In other words, shareholders drip money into the company for a bigger payoff later.

Compounding Dividends
Compounding Dividends in AT&T over ten years. Image by SeekingAlpha.

How does this work? Let’s say you bought three shares of AT&T and reinvested your dividends and an additional $100 every quarter, after ten years, you’d be rolling in 229 shares and $620 in dividends payments. 

How Can I Buy Blue-Chip Stocks? 🗺

You can buy blue-chip stocks, as well as other stocks, by using a broker. Since no one wants to be the person who bought a bunch of “Regulation S” stock from an overseas fraudster, choose your stock broker wisely.

Since blue chips are safe, it only makes sense your stockbroker is also safe and reputable. Brokers are as diverse as blue-chip stocks, so it is important to find a trustworthy stock broker that works for you—that’s where you get the best prices, tools, and the tightest security. 

How Can I Buy Foreign Blue-Chip Stocks? 🌏

Since Asia’s top-performing economy could perform even better in 2021, it makes sense to research foreign markets. While investing abroad can be intimidating, remember—this is the age of the internet and someone’s already made tools that can help you. 

If you are looking to trade in markets outside the U.S. and want a firm with a great selection of tradable securities, the most popular broker in the international field is Interactive Brokers. IBKR has three different tiers for different types of investors, so you’re sure to find a service to fit your investment needs. 

Blue-Chip Stock Funds 🗂

Investing in blue-chip stock ETFs, has many benefits. And as a bonus, ETFs were developed in the 90s, so they have had quite a bit of time to evolve. 

ETFs are similar to stock indices and mutual funds in that they are inherently diversified and have a lower risk than buying individual stocks. However, unlike mutual funds, ETFs are traded like stocks and have lower fees because they are passively managed rather than controlled by a fancy suit. 

If an investor wants strong dividend yields, they might want to consider investing in individual stocks rather than an ETF. Even though ETFs are passively managed, there is a management fee, unlike buying individual stocks. For investors with a tight budget, there are plenty of blue-chip stocks under $20.

Some of the most popular blue-chip ETFs include:

IndexTicker SymbolGrowth from 2016 to 2021 (estimate)
SPDR S&P 500 ETFSPY104%
Vanguard Russel 1000 Value ETFVONV62%
Invesco QQQ Trust Series 1QQQ211%
ProShares UltraProTQQQ1453%
ProShares S&P 500 Dividend AristocratsNOBL75%
PowerShares S&P 500 Low Volatility PortfolioSPLV50%
iShares MSCI EAFE ETFEFA38%

How to Measure the Performance of Blue Chips 📐

Investing like a boomer also requires acting like a boomer by measuring the performance of blue chips. To do this, it is important to understand stock chart patterns—and refer to stock indices. 

While the Dow Jones is used to measure the American stock market as a whole, it is actually an index of America’s top blue-chip stocks. However, some economists believe the Dow is a little too exclusive. Since it only tracks 30 companies, it doesn’t effectively represent the market at large. 

The S&P 500 is comprised of (you’ll never guess) 500 companies, but the ten largest companies have stake in 27.5% of the market cap. The S&P also includes “dividend aristocrats,” companies that have issued dividends for at least 25 years. 

The Nasdaq-100 includes the largest non-financial companies. This index includes the popular “FAANG.” This is not the ticker for a vampire, but it does represent some of the sharpest blue-chip companies: Facebook, Apple, Amazon, Netflix, and Google.

Nasdaq100 Index
Total returns of NASDAQ-100 (NDX) and S&P 500 (SPY) over 10 years. Image by TradingView.

Depending on a person’s investment strategy, one index might be better than another. For example, an investor looking for more growth would probably want to focus on the NASDAQ-100. If dividends are important, an investor might focus on the S&P Aristocrats. 

Since 2011, the NASDAQ-100 has had a 445% return, making it the Lambo of indices. Nevertheless, slow and steady often wins the race, which is why long-term investments tend to have way bigger returns and far less risk than short-term investments.

How Blue-Chip Stocks Perform During a Recession 📉

While blue-chip companies tend to be recession-resistant, they are not recession-proof. A recession like the one sparked by the coronavirus can destroy companies as easily as Thanos destroyed half the life in the entire universe. In other words, a recession can impact even the bluest of blue chips. We can see how this played out in historical recessions as well. 

History shows us that recessions impact the price of the stock more than the dividend growth. However, this is not to say dividend growth is not impacted by recessions. In fact, the COVID-19 crisis has caused 493 companies listed on the London Stock Exchange to cut or suspend their dividends.

Dividend Growth
S&P 500 Dividend Growth from 1968-2018, showing a dramatic decline in the 2009 recession. Image by simplysafedividends.com

However, despite the pandemic causing a slight bump in bond yields, the Oracle of Omaha, Warren Buffet, argues the bond market has a bleak future. In this case, perhaps it is time to invest in blue-chip stocks. Next stop compound town. 

Blue-Chip Stocks: FAQs

  • Are Blue-Chip Stocks Worth it?

    Absolutely. Blue-chip stocks are worth your investment, particularly for a long-term strategy. However, their high price might render them unaffordable to younger investors who might benefit more through growth stocks.

  • Are Blue-Chip Stocks Safe?

    Blue-chip stocks are safer than most stocks, although no stock has a 100% guarantee. This is because blue chips have enormous customer bases, low debt, substantial cash reserves, and are the first in line whenever a government bailout goes out. 

  • How Many Blue-Chip Stocks are There?

    There is not a concrete list of blue-chip stocks, although the most prominent blue chips are the 30 listed on the Dow Jones Industrial Average. Other blue chips are older, well-known companies that have maintained steady growth throughout all kinds of crises.

  • Why are Blue-Chip Stocks Stable?

    Blue-chip stocks are stable because the companies that issue them have been around for a long time and because the companies tend to have slow growth. They are also less prone to be negatively influenced by a recession than most other stocks.

  • How Do I Buy Stocks that Pay Dividends?

    You can buy stocks that pay dividends through a broker. To get an idea of what stocks pay dividends, research the Dow Jones Industrial Average and the S&P 500 dividend aristocrats.

Get Started with Blue Chip Stocks

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People who struggle to save

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Huge discounts for high-volume trading

Pioneer of commission-free stock trading

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Promotion

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All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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