I’m sure many of you’ve heard the term blue-chip stocks … but what are they? And what makes them so special?
Investopedia describes blue-chips as well-established and financially sound companies that have operated for many years with dependable earnings…
But I like to think of them as the champs of the stock market. Typically, these stocks are considered reliable and safe investments. Let’s take a closer look…
Table of Contents
- 1 What Are Blue-Chip Stocks?
- 2 Blue-Chip Stocks vs. Index Funds
- 3 Examples of Blue-Chip Stocks
- 4 Average Rate of Return on Blue-Chip Stocks
- 5 Why Should You Invest in Blue-Chip Stocks? Here Are a Few Advantages
- 6 How Can You Invest in Blue-Chip Stocks
- 7 Top 10 Blue-Chip Stocks List for 2020
- 8 Conclusion
What Are Blue-Chip Stocks?
The term ‘blue-chip stock’ originates from the blue chips at a poker table. At a standard poker table, the most valuable chips are blue. That translated over to the most valuable companies on Wall Street.
These are market leaders and extremely popular among investors. Unlike the sketchy penny stocks my students trade, these stocks are household names. They’re large companies worth billions of dollars and often help shape the economy.
But just because a company has a market cap of a few billion dollars doesn’t automatically make it a blue-chip stock. There’s no clear guidelines as to which companies make the ‘blue chip’ cut. But the general concessions are that a company needs to have a market capitalization of at least $5 billion and years of stable earnings.
To keep it simple, if your family members have no trading knowledge and can talk about the company at over dinner, it’s probably a blue-chip.
The easiest way to find these stocks is to look at the most significant components of the three large indexes in the U.S.: Dow Jones Industrial Average, the Standard & Poor’s 500, and the NASDAQ-100.
Blue-Chip Stocks vs. Index Funds
If blue-chip stocks are the major components of index funds, why not just buy index funds?
I mean … if you’re that lazy, go for it. But for those of you who are serious about maximizing your returns, it’s essential to know the difference.
Index funds track an entire index. For example, the SPDR S&P 500 ETF is one of the most popular index funds. It directly follows the movements of the S&P 500. Index funds can be great if you’re looking for an easy way to diversify your portfolio. They give you access to multiple industries without having to buy individual stocks.
And index funds can give you easy access to the market with minimal risk because of your diversification. That doesn’t mean there’s NO risk … it’s just less risky.
With any form of investing, there’s always a risk. During the Great Recession of 2008, the entire stock market collapsed, even the “risk-free” investments.
Blue-chips are more concentrated than an index fund. Rather than owning an entire index and being diversified, these stocks are individual companies.
However, because they aren’t diversified, they’re considered riskier than index funds. Sure — they’re safer than speculative low-priced stocks. But you lose the diversification safety net that index funds can offer.
Blue-Chip Stocks and Dividends
A key characteristic of these stocks is dividend yields. These companies pay shareholders a portion of the company’s profits in the form of a dividend.
Dividends are paid out every quarter after company earnings. One way to take advantage of dividends is to reinvest them back into more shares of the company. That allows you to purchase more of the company’s stock without investing more of your hard-earned money. Then, in the next quarter, you’ll receive more dividends.
Over time, reinvesting dividends creates a snowball effect. The best example of this is Warren Buffett’s investment in The Coca-Cola Company (NYSE: KO).
In 1988, Buffet invested $1 billion in KO stock. Today, he earns $640 million in dividend payments every year. In other words, he makes 64% of his initial investment in dividend payments alone … every year.
High Dividend Blue-Chip Stocks
Dividends are one of the major benefits of owning blue-chips. A lot of them offer a high dividend. Here’s a list of some high dividend blue-chip stocks and their dividend yields.
|Company & Stock Symbol||Dividend Yield|
|AT&T (NYSE: T)||6.6%|
|General Mills (NYSE: GIS)||4.2%|
|Dominion Energy (NYSE: D)||4.6%|
|LyondellBasell Industries (NYSE: LYB)||4.5%|
|Bank of Nova Scotia (NYS: BNS)||4.5%|
|Chevron (NYSE: CVS)||4.0%|
|Royal Dutch Shell (NYS: RDS.A)||6.0%|
|International Business Machines (NYSE: IBM)||4.6%|
|Altria Group (NYSE: MO)||6.4%|
|Verizon Communications (NYSE: VZ)||4.3%|
Examples of Blue-Chip Stocks
In the list above, there are some great examples of blue-chips, but they’re not all required to have a high dividend yield.
As time goes on, more companies will enter the notorious blue-chip category. For years, many financial analysts and advisors have argued whether tech companies like Apple Inc. (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), and Alphabet Inc. (NASDAQ: GOOG) make the cut.
These companies have demonstrated consistently strong revenues and will likely remain stable far into the future because of their innovations. However, some financial professionals refuse to accept these ‘newer’ tech companies into the same league as historic blue-chips.
Average Rate of Return on Blue-Chip Stocks
The historical rate of return for blue-chip stocks is between 8% and 12%, with dividends reinvested. The percent return on these stocks is slightly above the returns of the overall market.
It’s important to note that every year these giants don’t return 8% and 12%. Those numbers are an average of the entire history of the stock market. So it’s likely you’ll have some years where you get a 0% return and others where you get over 20%.
Remember, when you decide to invest in blue-chip stocks, you’re looking at the long-term picture. It can take years — decades even — to reap the full rewards they potentially offer.
Why Should You Invest in Blue-Chip Stocks? Here Are a Few Advantages
Quick disclaimer: I’m not an investor and I’m in no way giving you financial advice. All trading and investing is risky. Never risk more than you can afford. Do your due diligence.
Blue-chip stocks are the closest thing to having no risk in the stock market. These stocks move slowly, and investors won’t be struck with unexpected news that can drastically move the stock price.
Plus, these are older and well-established companies. That makes it easier for newer investors to follow them. There’s a ton of information about these companies on the internet, and many of them find their way into your local news.
And these stocks can give investors peace of mind. If you choose to invest in blue-chips, you won’t have to babysit them all day, watching every little price movement. Instead, you can sit back and collect your above-average returns and a nice 4% average dividend.
Disadvantages of Blue-Chip Stocks
Of course, these stocks have the same drawbacks as other investments. There’s always a risk a stock will take a large dip. The risk can be lower with blue-chip companies, but it’s not zero.
Remember Eastman Kodak? Fifty years ago, this was one of the hottest stocks in the entire market. But the company failed to innovate and was forced into bankruptcy.
The average blue-chip stock moves slowly, so your money can be safer. But the return on investment isn’t as high as it could be if you choose to manage your portfolio actively. Many of my top Trading Challenge students achieve far greater returns than these slow giants could ever produce in a year.
[Please note these results are not typical. These traders have exceptional knowledge and skills that they’ve developed with time and dedication. Most traders lose money. Trading is risky. Do your due diligence and never risk more than you can afford.]
How Can You Invest in Blue-Chip Stocks
Anyone with a standard brokerage account can purchase blue-chips. No special broker is needed — these stocks are easily accessible. Many people often buy them in their retirement accounts, such as their company’s 401(k) plan or an IRA.
Often, the best time to invest is after bad earnings or any other lousy announcement. These reports usually cause a stock to dip in the short term, but when a stock has blue-chip status, it often bounces back and continues higher in the long term.
Again, this is for educational purposes. I’m not giving you financial advice. All trading and investing is risky. Do your due diligence.
Where Are Blue-Chip Stocks Traded?
Most trade on the New York Stock Exchange (NYSE), which is the oldest and most prestigious exchange in the U.S. The NYSE is by far the largest public stock exchange in the world, with a market capitalization of $30.1 trillion.
Because these stocks are considered safer, there are few regulations about the purchase of them.
How Many Blue-Chip Stocks Are There?
There’s no simple answer to this question.
Some people have strict definitions about the criteria a company must meet to be considered a blue-chip. There are no set criteria … But if you research a company and it’s been stable for many decades and consistently pays dividends, odds are it makes the cut.
Top 10 Blue-Chip Stocks List for 2020
With any investment, it’s impossible to know where it will be in a year. After this 10-year bull market, stocks could be anywhere. I’m not saying we can’t go even higher because that’s entirely possible.
However, a recession is overdue, and you must be prepared for some of your favorite blue-chip stocks to pull back. These pullbacks can be the best times to buy for your retirement accounts decades down the road … if that’s what you’re into.
Here Are 10 Blue-Chips Stocks I’m Watching
American Express (NYSE AXP): American Express is primarily in the credit card business. With the slow disappearance of paper money, credit cards have cemented their way into American consumers’ wallets. Unless there’s a major innovation in the finance space, consumers will continue to use credit cards for the foreseeable future.
AT&T (NYSE: T): AT&T is a telecommunications firm. Along with Verizon Communications (NYSE: VZ), these companies control the majority of the cellular data market. People won’t stop using their smartphones anytime soon. Plus, both of these made my high dividend list above.
Berkshire Hathaway (NYSE: BRK-B): This is Warren Buffet’s company. I provided the ticker for their non-voting B-class shares because they’re more reasonably priced. The A-class shares trade for over $300,000 a share. Investing in this company would essentially be putting your money on one of the greatest investors of all time.
Boeing (NYSE: BA): Boeing has been in the news a lot lately because of its issues with the 737 Max. Thinking long term, this is probably a decent buying opportunity. However, there’s no way to know if it’ll go lower in the short term.
The Coca-Cola Company (NYSE: KO): About five years ago, I thought this company was about to lose its status because soft drinks were on their way out. But it acquired more brands outside the soda industry, including many health drinks, and is now well positioned to continue to grow into the future.
Johnson & Johnson (NYSE: JNJ): Johnson & Johnson is very well-known and likely in every household. It produces many consumer products like Listerine and owns the Tylenol brand. Just think of how many households keep J&J products on hand…
McDonald’s Corporation (NYSE: MCD): Honestly, I’m amazed at how well McDonald’s has adapted to the health-conscious consumer. Don’t get me wrong, the food is still bad for you. But the company has incredible marketing tactics that keep people coming back again and again.
United Technologies (NYSE: UTX): It’s important to try to diversify your portfolio. United Technologies operates in the technology space … It’s one way to get some exposure to the tech industry. However, they also have segments in aerospace and HVAC.
Wal-Mart Stores (NYSE: WMT): Wal-Mart is the only retail store that can compete against the growing Amazon (NASDAQ: AMZN) innovation. The company continues to draw large crowds into its brick-and-mortar locations, and it’s increasing its online retail presence.
The Walt Disney Company (NYSE: DIS): Disney is in nearly every home in the U.S. and regularly produces highly anticipated movies that smash box office records. Its new platform, Disney+, is already downloaded on over 22 million devices. 2020 should be a big year for DIS.
Blue-chip stocks can be a great investment for the long term and a great way for newer investors to dip their feet into the market. The returns on these stocks are slightly above average, and there aren’t many safer places to park your money.
The downside? They aren’t always accessible to traders with small accounts.
Want to learn how to manage your own money? Or how you can trade with a small account? Apply for my Trading Challenge today.
Maybe you want a solid overview of day trading … Check out this book written by one of my top Trading Challenge students: “The Complete Penny Stock Course.”
2020 will be an exciting year. There are a lot of catalysts lining up, and I’m always excited about the January Effect.
I want to wish you the best of luck with your investing and hope to see you in my chat room.
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