Blue chip stocks are an excellent addition to investment portfolios. Blue chip companies are often household names, and you may wonder if it’s worth investing in them.
But can any investor buy blue chip stocks? Which companies are considered to be blue chip? What are Steady Eddies? How do I purchase several blue chip stocks at a time? The answers to these questions, and more, are explained below.
What Is a Blue Chip Investment?
A blue chip investment is a high-quality investment from a stable, long-established company. The term “blue chip” derives from poker, where the blue chips are the highest value.
Blue chip stocks are considered relatively safe investments as they aren’t very volatile long-term, though there may occasionally be short-term volatility.
The companies have strong performance histories. These are large-cap stocks that usually pay dividends.
All the components of the Dow Jones Industrial Average are publicly-traded blue chip stocks.
The Dow Jones Industrial Average contains 30 well-known large-cap companies.
These stocks are also substantial components of other indexes, such as the S&P 500 and Nasdaq.
Blue chip stocks tend to cost more on a valuation basis than less established stocks, but they are also more likely to hold their value or appreciate in value consistently.
What Are Blue Chip Companies?
Blue chip companies are reliable, well-established, and financially sound. They have a high return on equity and return on assets. Market capitalization is typically in the billions or even hundreds of billions.
These companies are the leaders in their industries and have a significant amount of name recognition.
Smaller companies are riskier and may go bankrupt. Blue chip companies have typically been around for decades and have already survived stock market downturns. It’s unlikely these companies will go bankrupt.
In fact, blue chip companies often buy out weaker competitors when the economy isn’t doing well. However, it is still possible for blue chip companies to fail.
Lehman Brothers, a former giant in the investment banking world, and General Motors, America’s largest auto manufacturer, are examples of blue chip companies that seemed stable but either collapsed (Lehman Brothers) or filed bankruptcy (General Motors).
It’s wise to never go all-in on one blue chip company but rather have shares from several companies, so you still have funds if one goes under.
What Is an Example of a Blue Chip Company?
Apple is the world’s largest company by market capitalization and, therefore, the foremost blue chip stock. It is one of the most recognizable brands of any company on this blue chip stocks list and is well known as a premium product.
This blue chip stock manufactures hardware, produces proprietary software, and provides services that work seamlessly together.
Apple is a lifestyle brand; it’s in everything you do with your phone or tablet and has been for decades. The original mouse was actually invented by Apple back in 1979 when there were no computer mice made yet!
That means not only can we expect many more years from them but also new innovations as well.
Consider this one of the best high-quality stocks, which qualifies as a long-term investment for your portfolio.
Their steady growth and proven track record of past performance show this blue chip stock has a place in many investors’ portfolios.
They also pay regular dividends, making them a great passive income idea for most investors and worth considering as one of the individual stocks in your diversified portfolio.
Stay tuned for the continued market dominance they seem to command.
Related: How to Buy Apple Shares
2. Walt Disney
Buying shares of Walt Disney stock for your diversified portfolio might make sense for beginner investors and seasoned vets as well.
Buying this blue chip stock might bode well for you as a buy-and-hold investor for the rest of your life.
2020 didn’t bode well for the House of Mouse’s income statement. The company’s theme parks and cruise lines were shuttered because of the pandemic and the economic downturn, causing it to turn in its first loss in four decades. Not a report card anyone wants to bring home.
But, who cares? Do you want to watch Disney classics any less? Doubtful. You and your kids still love Disney — and investors do, too.
Perhaps you’ve noticed this blue chip’s stock price sailing to all-time highs despite the short-term setback. Why? Much like a strong investment portfolio, it has diversified its business across several different areas.
The entertainment conglomerate weathered the storm and will stick around for many years if their Disney+ business has anything to say about it.
The largest companies have a well-established core business but, generally speaking, also have several areas of their business to diversify how they earn revenue.
Related: How to Buy Disney Shares
If you’re hooked on McDonald’s, making yourself an investor could be a good idea. The company had a bit of a rough patch during 2020 due to COVID, but which physical retail or restaurant hasn’t?
You can learn about income-generating assets through buying this company’s stock and claiming their juicy, regular dividend payments. The company has continually raised its dividend payout for the last 44 years and currently yields around 2.4% at current prices.
You might bank those steady dividends now by reinvesting them back into the stock for a later date when you might need the money.
Related: How to Buy McDonald’s Shares
4. Alphabet (Google)
Alphabet, or the holding company of the better-known subsidiary, Google, has the world’s leading search engine. Rather, the two leading search engines: Google Search and YouTube. Together, these companies represent some of the world’s leading household names.
Alphabet is another blue chip stock worth considering if you’re buying blue chip stocks and creating a diversified portfolio with large market caps and a proven track record of growth.
Whenever you have a question and type it into a browser or phone or ask it out loud to a smart speaker, odds are Google provides the answer.
The company has created a dominant market position in the search market and continues to gain market share in the cloud market with its Google Cloud business.
The company isn’t shy about investing in its business and using that investment to grow into new areas to build the company’s market value to investors’ benefit.
And their strategy has bolstered share prices, weathered market downturns well, and landed them in nearly any exchange-traded funds tied to market capitalization you can find.
Unlike most blue chip stocks in the stock market, Alphabet doesn’t make regular dividend payments. This means you won’t find it in the Dividend Achievers Select Index or among the other best blue chip stocks known for making regular dividend payments.
Instead, you’ll find it as an industry leader reinvesting back in its business. Paying dividends doesn’t appear as an appealing way to reward investors in this blue chip stock’s eyes.
Investors turn to the company for its growth potential, which is something unusual in blue chip stocks of this size.
Related: How to Buy Google Shares
Coca-Cola is the world’s largest beverage company and one of the most recognized household names and blue chip stocks in history.
The Coca-Cola Company owns an extensive portfolio of nonalcoholic beverages, including sparkling drinks, still drinks, juices, teas, and coffees.
Coca-Cola is a brand that investors tend to turn to during market downturns because so many people see Coca-Cola’s companies’ products as indispensable, no matter the economic circumstances.
But it also does well during periods when the market trends up, sitting firmly in a blue chip index like the Dow Jones Industrial Average and many mutual funds and exchange traded funds (ETFs).
Further, it makes an intriguing individual stock to hold for a long period of time because the company pays dividends to investors.
As discussed above, many blue chip stocks tend to have steady earnings growth and pay dividends, making them a favorite on Wall Street and Main Street alike.
If you want to invest money that helps you drink more Coca-Cola in the future through their decision to pay dividends, then this might be the right stock for them!
However, you’ll likely want to drink the company’s healthier products instead of their namesake product. But don’t worry because they’ve got plenty of healthier options to buy instead.
Related: How to Buy Coca-Cola Shares
Netflix is a great blue chip stock to consider in the stock market as well. It is a household name that carries increasingly large market capitalizations as the company grows in size with its subscriber base.
The market cap continues to grow because this blue chip stock provides popular media and video streaming services through its online library of movies, TV series, documentaries, and other content.
More than 200 million users globally have downloaded the app, with the service now available in 190 countries worldwide.
Netflix competes primarily with Hulu, Amazon Prime, HBO Max, Disney+, Google’s YouTube as well as Facebook-owned Instagram TV who also offer similar offerings. Not to mention traditional television.
Netflix remains king of content for the time being and has made its ambition to remain in that spot by investing heavily in original content that appeals to everyone in the family. Time will tell, but pre-COVID, Netflix seemed a bit less necessary in a monthly budget.
Now, many viewers can’t imagine not having it appear on their credit card statement each month. This blue chip stock should provide some exposure to the emerging trend of on-demand entertainment.
Related: How to Buy Netflix Shares
How Do You Invest in Blue Chips?
You can buy blue chip stocks from the brokerage firm of your choice. While brokerages differ in the small-cap investments they hold, you should be able to find blue chip stocks with any major brokerage.
There is no need to be an expert to invest in blue chip stocks. The process is the same as buying any other stocks.
No matter what type of stock you are purchasing, always research the company first by looking at historical stock prices, earnings reports, and dividend payments. You may also choose to consult with an investment advisor.
When trying to choose the best blue chip stocks, you should also consider their industry. Some industries are more likely to grow than others.
A company might be able to pivot a product or service, but it’s still smart to look at which industries have the most growth potential moving forward and which industries are starting to die out.
Stocks are a liquid investment so you can sell your blue chip stocks at any time. It’s recommended to hold them long-term for the best returns, but you aren’t required to do so.
You can buy blue chips stocks as individual stocks or through a blue chip index fund.
Individual stocks are an excellent idea if there are particular stocks you believe have substantial gains. Individual blue chip stocks have greater risk but may also outperform funds.
These stocks are often more expensive than stocks from less established companies.
However, that doesn’t have to stop you from investing in blue chip stocks with a low investing budget.
While the higher cost may have limited who can invest in these stocks in the past, the popularity of fractional investing on the rise has given more people slices of stock shares.
An index fund or ETF is a great option for blue chip stocks because it helps diversify your portfolio.
When you buy an ETF, you automatically have exposure to tens or hundreds of stocks. If one of your stocks decreases, it’s usually balanced out by the other stocks that increase.
What Is a “Steady Eddy”?
“Steady Eddy” investing focuses on companies with consistent results and long-term growth. They offer dependable, high-conviction investment opportunities you can rely on to hold steady even when the going gets tough.
These companies tend to perform well on account of having a strong economic moat, or competitive advantage, they’ve built for themselves in a mature business.
They can build a moat in many ways, such as offering unique products and services, owning a patent or novel technology, having a significant first-mover advantage in a market, or another compelling reason why this company will likely be around for years to come.
Steady Eddies also tend to be the largest companies, and thus not have high growth prospects. However, they often can do well in any economic environment.
To the point, these companies offer resiliency during market uncertainty and can rely on incredibly stable and recurring sources of revenues—offering investors a higher chance for realizing long records of positive returns and an investment that can stand the test of time.
Where Can You Find “Steady Eddies”?
The best stock picking services consider several variables when making their selections to subscribers. Have a look at the award-winning flagship Motley Fool stock research service, Stock Advisor, subscribed to by hundreds of thousands of investors.
This subscription makes for a great short-listing system to find good stocks worth investigating yourself—and possibly even buying for your portfolio for the long-term.
The Stock Advisor service recommends buying and holding Steady Eddies for no less than five years, departing with some of the other swing trade alerts services people use to find short-term profit potential in the stock market.
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Related Blue Chip Investing Questions
Your burning questions about investing in blue chips are answered below.
Are There Blue Chip Funds?
Yes, there are blue chip funds. Blue chip funds are index funds or ETFs that hold a curated collection of large-cap investments. In addition to stocks, the funds might invest in bonds and cash equivalents.
You can buy shares of many blue chip companies in a single transaction with blue chip funds.
It’s an easy way to diversify your blue chip investments. Like individual stocks, your blue chip funds likely pay a dividend.
ETFs are a liquid investment that you can sell any time. However, you should plan to invest in blue chip funds long-term for the highest returns.
ETFs will have a much lower expense ratio than mutual funds holding the same stocks because ETFs are more passive while mutual funds are more actively managed.
There isn’t an official category of funds called blue chips. Some funds containing mid-cap stocks that are expected to grow will brand themselves as “emerging blue chip funds.”
Mid-cap stocks are riskier than large-cap stocks. You shouldn’t buy a fund solely because “blue chip” is in the title. Always look at what stocks a fund holds to see whether they are truly blue chip.
As you would with individual stocks, check the performance of a blue chip fund and how it compares to the overall stock market.
Are Blue Chip Stocks a Good Investment?
Blue chip stocks are an excellent investment because of their reliability.
Whether held individually or as part of a fund, blue chip stocks should be part of every investor’s portfolio. The dividends, which almost all blue chip companies pay, work great as a passive income or as a way to compound your investment earnings.
The dividend payments also help protect your portfolio against inflation.
You haven’t “missed the boat” when investing in large companies. Just because they already have higher stock prices doesn’t mean the price won’t continue to go up.
Since these aren’t volatile stocks, the value is likely to be up when you sell rather than down.
During a bear market, blue chip stocks tend to recover faster than other stocks.
Blue chip stocks, being a safer investment, are especially attractive for investors near retirement.
Younger investors may focus more on individual blue chip stocks, while older investors might have more blue chip funds.
Another reason these stocks are a great investment is that they require little oversight. You can buy and hold them passively without having to manage them actively.
You may own blue chip stocks without even realizing it. They are prominent in many ETFs and mutual funds. If you have a 401K plan through work, it’s likely these stocks are present in your portfolio.
A downside is that the overall returns may be lower than some newer companies. However, you don’t want any one type of stock to make up 100% of your portfolio anyway.
Diversification is always important. You can have blue chip stocks as part of your portfolio and have a smaller percentage of stocks that are higher risk and may produce a higher reward.
Who Should Buy Blue Chip Stocks?
Blue chip stocks are an excellent addition to any investor’s portfolio. They are particularly a good fit for people nearing retirement or conservative investors who want low-risk investments.
Blue chip stocks are also useful for beginners as it can be comforting to invest in a company you have heard of and personally enjoy. It’s a way you can make money through the stock market while also supporting a business you like and want to grow.
Anybody who wants to receive steady dividends should look into blue chip stocks. Most, but not all, of these mature stocks pay dividends. The more shares you own, the more dividend money you receive.
You can reinvest this money to increase the number of shares you have or use the funds as passive income.
Investing in blue chip stocks can help you avoid making emotional, rather than rational, purchasing decisions. It’s challenging to time the market and make short-term trades.
If you use the dollar cost average method, meaning you regularly buy an asset despite price fluctuations, you can decrease the impact of volatility.
Blue chip stocks work best as long-term investments. These can be particularly good investments for people buying during a market downturn.