Blue Chip Stocks

Apple, Microsoft, Coca-Cola, Johnson & Johnson — these are household names. These companies’ market capitalization is in the billions. They are industry leaders in their respective sectors.

Large, well-established, financially sound corporations like these can remain profitable whether the economy is good or bad. The reliability with which their shareholders get paid gives them a ton of stability as their reputation keeps investors around and attracts more. To own stock in these “blue chip” companies is to receive stable returns, often in the form of dividends.

Blue chip stock doesn’t tend to show explosive growth the way smaller growth stocks might. Those companies may not be paying out dividends, but reinvesting most of their profits in growth. For investors in the market for a combination of income and capital appreciation, and interested in building wealth over time, blue chip stocks are the most prudent strategy. They are often included in a diversified portfolio to mitigate risk.

How investing in blue chip stocks works

Here’s what’s involved:

Research and selection

Establish your investment goals, research the top blue chip companies’ financial health history, identify their current market positions, and select the ones that align the most with your needs.

Open a brokerage account

A traditional brokerage, an online platform, or a robo-advisor can help you invest in blue chip stock. There’s a lot involved, so it’s in your best interest to use a broker that offers all the tools and materials you’ll need to invest wisely.

Funding the account

Put the money you want to use for investing in your account.

Placing orders

Through your brokerage account, place orders to buy shares. A market order will buy them at the current market price; a limit order will buy if and when the stock reaches a certain price on descent or ascent.

Owning the stocks

You are now a part-owner of a blue chip company. This most likely means you will receive dividends, and likely, you will also be expected to vote during regular shareholder meetings.

Monitoring investments

Review your portfolio on a regular basis. You need to stay aware of its performance so you can make adjustments if needed.

Tax considerations

Your investment in blue chip stocks comes with taxes. You may be taxed on company profits and dividends.

Who invests in blue chip stocks?

How blue chip stocks are categorized

By industry

1. Technology: Companies involved in IT, software, and consumer electronics (e.g. Apple, Microsoft).

2. Healthcare: Firms in pharmaceuticals, biotechnology, and medical devices (e.g. Johnson & Johnson, Pfizer).

3. Consumer goods: Companies producing household or personal products (e.g. Procter & Gamble, Coca-Cola).

4. Financial services: Banks, investment firms, and insurance companies (e.g. JPMorgan Chase, Berkshire Hathaway).

5. Energy: Established firms in oil, gas, and renewable energy (e.g. ExxonMobil, Chevron).

By dividend policy

1. Dividend aristocrats: Blue chip stocks that have consistently increased their dividends for 25 years or more (e.g. 3M, PepsiCo).

2. Growth dividends: Companies that have a strong potential for capital appreciation and also pay dividends (e.g. Microsoft, Visa).

By market capitalization

1. Large-cap stocks: Blue chips usually have a market capitalization exceeding $10 billion, often much higher, reflecting their established nature and stability.

By geographic region

1. U.S. blue chips: Major companies based in the United States, typically listed on major exchanges like the NYSE or NASDAQ.

2. International blue chips: Established companies from other countries that are traded on global exchanges (e.g. Nestlé in Switzerland, Toyota in Japan).

By economic sector

1. Cyclical stocks: Companies whose performance is closely tied to the economic cycle (e.g. General Motors).

2. Defensive stocks: Firms that provide consistent dividends and stable earnings regardless of the economic environment (e.g. Coca-Cola, Walmart).

These categories help investors understand the diverse nature of blue chip stocks and guide them in constructing a portfolio that aligns with their investment objectives and risk tolerance.

More tips

Start small

If you’re starting out with investing in blue chip stock, don’t just dump all your capital into one company. Get comfortable and familiar with the process gradually.

Avoid emotional trading

Stick to your strategy and avoid making impulsive decisions based on market fluctuations or emotional responses. Blue chip stock is about long-term growth. Just make sure you’re in the right hands brokerage-wise.