Blue Chip Meaning and Examples

What Is a Blue Chip?

A blue chip is a nationally or internationally recognized, well-established, and financially sound company that's publicly traded. Blue chips generally sell high-quality, widely accepted products and services.

Blue chip companies have reputable brands that have been built and maintained over many years. That and the fact that they've weathered multiple downturns in the economy make them stable companies to maintain in a portfolio.

Blue chip companies operate profitably despite adverse economic conditions. This helps to contribute to their long records of stable and reliable growth.

Understanding Blue Chips

The term "blue chip" was first used in 1923 by Oliver Gingold, an employee of Dow Jones, to describe stocks that traded at $200 or more per share. It relates to blue, white, and red poker chips with the blue chips having the greatest value.

Blue chip stocks aren't necessarily stocks with a high price tag. They're shares of high-quality companies in healthy financial condition that have withstood the tests of time.

A blue chip stock is generally a component of the most reputable market indexes or averages such as the Dow Jones Industrial Average, the Standard & Poor's (S&P) 500 and the Nasdaq-100 in the United States, the TSX-60 in Canada, and the FTSE Index in the United Kingdom. They're usually listed on major stock exchanges such as the NYSE and the Nasdaq.

How large a company must be to qualify for blue chip status is open to debate. A generally accepted benchmark is a market capitalization of $10 billion although market or sector leaders can be companies of all sizes. 

Many conservative investors with low-risk profiles or those who are nearing retirement might prefer blue chip stocks. They can offer capital preservation and consistent dividend payments for income and protection against inflation.

Benjamin Graham suggests in his book, The Intelligent Investor, that conservative investors look for companies that have paid dividends consistently for 20 years or more.

The Dividend Aristocrat stock list published by Standard and Poor’s is made up of large-cap blue chip companies in the S&P 500 that have increased dividends every year for 25 years.

Examples of Blue Chip Stocks

A blue chip company can be a multinational firm that has operated successfully for several years, is a dominant leader in its industry, and is widely recognized.

Some examples include:

• Coca-Cola
• Berkshire Hathaway
• Amgen
• UnitedHealth Group
• PepsiCo
• Nike
• Proctor & Gamble
• Chevron
• Walmart
• IBM
• McDonald’s
• Caterpillar

Characteristics of Blue Chip Stocks

Blue chip stocks are seen as less volatile investments than shares in companies without blue chip status because of their noteworthy institutional profile and longstanding financial health. They share some other characteristics as well.

• Blue chips are highly liquid because they're frequently traded in the market by individual and institutional investors alike. Investors who need cash can therefore feel confident that there will be buyers for their shares.
• Blue chip companies are also characterized as having little to no debt, large market capitalization, stable debt-to-equity ratio, and high return on equity (ROE) and return on assets (ROA).
• Solid balance sheet fundamentals and high liquidity have earned blue chip stocks an investment-grade credit rating.
• Dividend payments aren't necessary for a stock to be considered a blue chip but most blue chips have long records of paying stable or rising dividends.

Blue Chips As Safe Investments

A blue chip company will have survived financial challenges and difficult market cycles over the years. It will have turned in a steady return and typically paid dividends year in and year out. It can be perceived as a safe investment as a result.

This doesn't make it bulletproof, however. The bankruptcies of General Motors and Lehman Brothers during the global recession of 2007-2009, as well as several leading European banks, show that even the best companies can struggle during periods of extreme stress.

Blue chip stocks can be appropriate for the core holdings of a large portfolio but they shouldn't be the only investments. A diversified portfolio usually has some allocation of bonds and cash in addition to stocks. A portfolio's allocation to stocks can be diversified among large-caps, mid-caps and small-caps as well as domestic and international stocks.

Younger investors can generally tolerate the risk of having a larger percentage of their portfolios in growth stocks that include some blue chips because they have years to invest and recover from market mishaps. Investors who are approaching retirement might choose to focus more on capital preservation by putting a larger percentage of their investments in bonds and cash.

Advantages and Disadvantages of Blue Chip Stocks

Blue Chips come with pros and cons just as all investments do.

Advantages

Low risk: Blue chip companies are considered to be low risk because they're industry leaders with reliable cash flows and long histories of paying their debts. They're unlikely to suffer from sudden credit or liquidity crunches.

Reliable return: Blue chip companies typically provide reliable growth potential as well as consistent dividend payments.

Low volatility: Blue chips are seen as stable companies/stocks due to their well-tested business models, established operations, dependable revenue, and long-lived brands.

Less effort: The dependability and lower volatility they offer can mean less need for concern and monitoring.

Disadvantages

Lower returns: Returns can be reliable but well-established, mature companies such as blue chips offer more modest returns than smaller startups that have room for greater and more rapid growth.

More Expensive: Blue chips tend to be in greater demand and more expensive than stocks of other companies of comparable size because of their lower risk, reliable return potential, and lesser volatility.

How to Buy Blue Chip Stocks

Investors can buy individual blue chip stocks through a broker. They can also invest in blue chips by buying a fund that targets large-cap companies or market leaders. Many of these companies may be considered blue chips but investors can also gain useful exposure to other companies.

Investors can also buy mutual funds and ETFs that specifically target blue chip companies, giving them exposure to an entire basket of blue chip stocks with a single investment. Most asset managers offer one or more blue chip-focused funds, including Fidelity and BlackRock.

The Bottom Line

"Blue chip" is an informal term for the most reliable and valuable companies on the market. They're usually companies with a long track record of financial stability. They're typically leaders within their industry so they're often sought after and considered to be low-risk investments.