What are Blue Chip Stocks?

Robinhood Learn
Democratize finance for all. Our writers’ work has appeared in The Wall Street Journal, Forbes, the Chicago Tribune, Quartz, the San Francisco Chronicle, and more.
Definition:

Blue chip stocks are shares of large, well-established, and financially stable companies with a long history of attractive returns and profits.

🤔 Understanding blue chip stocks

Blue chip stocks are shares of large, established companies with a long history of attractive returns and financial stability. While there is always some risk involved with investing, blue chip stocks are generally considered to be less risky than penny stocks or shares of smaller companies. Traditionally, they have tended to be a mainstay of most stock portfolios. Some blue chip stocks even pay you dividends (payments for stockholders) just for owning them, which can help mitigate losses.

Example

Coca-Cola, a blue chip stock, has been in business since 1886 and has established itself as one of the largest brands in the United States. Its stock pays dividends four times a year, and it has a high market capitalization (more than $200B as of March 6, 2020).

Takeaway

Blue chip stocks are like family SUVs . . .

They don’t offer the same thrills as a sports sedan, but their size and safety features mean you’ll get to your destination in one piece — and maybe even enjoy yourself along the way. Similarly, blue chip stocks often don’t offer a lot of opportunities for a sudden windfall, but they generally won’t leave you making a run on your money.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.
Sign up for Robinhood
Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

Tell me more…

What are blue chip stocks?

Blue chip stocks form the basis of many investment portfolios. The shares of large-cap companies are generally considered to be the safer stocks to hold, as they are known for their relative reliability.

Unlike penny stocks (inexpensive, small-cap stocks), blue chip stocks may not have the potential to suddenly double in value in a month, but they also carry a lower risk of suddenly plummeting in value. Blue chip stocks generally have a history of slow, steady growth. But they don’t always grow — Some companies, such as General Electric, have lost their blue chip status after many years.

Additionally, some blue chip stocks, like JPMorgan Chase and Coca-Cola, pay dividends, which are kind of like a salary paid out to shareholders.

While past performance is no guarantee of future results, the combination of strong historical performance and the financial stability of a large company like Disney or Coca-Cola gives investors a reasonable expectation that they won’t lose all their money to a sudden bankruptcy.

But there’s always a risk — During the recession that began in 2008, several blue chip companies, such as General Motors and Lehman Brothers, did go bankrupt.

Although blue chip stocks are generally considered safe, all stock investments carry risk.

What makes a stock a blue chip?

There is no official criteria establishing blue chip status. Instead, the stock market as a whole determines which stocks are considered blue chips and which aren’t, and there’s room for disagreement. Stocks can gain and lose blue chip status over time.

However, blue chip stocks generally share the following features:

  • Dividend payments: Paying dividends is not a requirement for blue chip stocks, but many do pay dividends to shareholders.
  • High market capitalization: There is no single figure that companies need to reach to be considered a blue chip stock, but the market capitalization (number of shares * price per share) of blue chip stocks is generally in the billions. Many believe a stock must have a market cap of at least $5 billion to be considered a blue chip.
  • Industry leaders: Most blue chip companies are considered leaders in their respective industries. For example, Disney is a leader in media, McDonald’s in food, Walmart in retail, and AT&T in communications.
  • Financial stability: Blue chip stocks are usually from companies with strong financials and a low risk of bankruptcy in the near term.
  • History of growth: Blue chips have established their place in the market and have a long track record of steady growth behind them. These stocks are generally more capable of toughing out economic downturns, but not always.
  • Part of a market index: Blue chip stocks are commonly part of an index fund, such as the S&P 500, Nasdaq 100, or the Dow Jones Industrial Average.
  • Established brand: Many blue chip stocks are household names like Johnson and Johnson, Home Depot, etc., that are recognized on a national or international level.

Why should you invest in blue chip stocks?

Not everyone should invest in blue chip stocks. All investors must develop their own strategy based on their personal risk tolerance, timeline, and financial goals. Depending on these factors, a preferred/certain investment strategy may or may not include purchasing blue chip stocks.

However, many investment portfolios do include stocks to some extent, and blue chips are generally considered to be some of the safer stocks. For those who are either risk-averse or looking to diversify between high- and low-risk investments, blue chip stocks can help add a reasonable middle ground to their investment portfolios.

Plus, since many blue chips pay dividends, they can provide a regular source of income without having to sell off shares as they gain value. They offer regular payments, similar to bond coupon payments. As such dividends add another level of risk mitigation and relative consistency as compared to capital appreciation.

Are blue chip stocks safe?

No investment is entirely without risk, but blue chips are generally considered some of the safer stocks to hold.

Unfortunately, while blue chip companies generally have very strong financials and a long track record of growth, there are always circumstances in which they can lose value or even go bankrupt. That said, compared to other stocks, such as growth stocks (stocks from companies with faster-than-average growth rates) or penny stocks (small-cap stocks that trade at very low prices), blue chip stocks tend to be the more stable alternative.

During general stock market upturns, blue chips typically provide slower gains rather than significant short-term profits or high returns. They generally appeal to the more risk-averse investors who would rather have a good chance of making smaller gains than take the risk of big losses in the hope of making a huge profit. B

However, blue chip stocks are generally not considered as safe as some other assets, such as fixed income securities (bonds, certificates of deposit, mortgage-backed securities, etc.). Unlike with stocks, the return on these assets aren’t primarily based on capital gains. Instead, long-term they function more like loans: you lend money to a government, bank, or corporation in return for regular interest payments When the asset reaches maturity, the company is obligated to return your principal investment.

In this way, fixed income securities provide a few additional layers of protection compared to blue chip stocks: price fluctuations are generally less of an issue (they mostly affect the asset’s yield), and the principal investment is repaid in most circumstances (except in bankruptcies or defaults). With fixed income, if you hold your bond to maturity, there is generally a lower chance that you’ll walk away from your investment with less than you put in. This would hold with companies with equal financial strength.

Investors looking for safe assets may also want to consider investing in real estate or REITs. But, like stocks, their value fluctuates, and they don’t have the same principal protection as fixed income assets.

Overall, risk profiles tend to be relative. Blue chip stocks may have more risk than fixed income assets, but they tend to be safer than penny stocks.

What are the top blue chip stocks?

A stock’s status as “blue chip” may change over time, and investors should do their own analysis to determine which stocks they want to invest in. As of March 2020, there are many blue chip stocks to choose from, including, but not limited to:

  • IBM
  • Johnson & Johnson
  • Coca-Cola
  • McDonald’s
  • Disney
  • Walmart
  • JPMorgan Chase
  • Exxon Mobil

Many investors prefer to diversify their portfolio among sectors to reduce risk. For example, an investor may choose to divide their portfolio between Disney, Walmart, and JPMorgan. Since these three companies operate in different industries, they are typically not correlated in the same way that McDonald’s and Coca-Cola (two major partners) may be.

Some investors don’t choose their stocks on their own and prefer to invest in mutual funds instead. Mutual funds are pools of money from multiple investors that are used to buy a portfolio of different stocks. That portfolio is then typically balanced by the portfolio manager (an experienced investor and financial analyst) based on changing market conditions.

What are some undervalued blue chip stocks?

You will need to perform your own analysis to determine whether a stock is undervalued. In general, it is very hard to find an undervalued blue chip stock because so many investors have their eyes on them.

According to the Efficient Market Hypothesis (EMH), one of the prevailing market theories, you shouldn't be able to find undervalued blue chip stocks. Under this hypothesis, all publicly available knowledge about large-cap companies is generally considered to already be “priced in” — factored into the current price.

That said, not all economists agree with the EMH. You can always test this hypothesis and perform your own fundamental or technical analysis to see if you find something that other investors missed.

According to Warren Buffett, sometimes finding an undervalued stock just requires the courage to buy when everyone else is selling: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Ready to start investing?
Sign up for Robinhood and get your first stock on us.Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

20200407-1142931-3436020

Related Articles

You May Also Like

The 3-minute newsletter with fresh takes on the financial news you need to start your day.
The 3-minute newsletter with fresh takes on the financial news you need to start your day.


© 2021 Robinhood. All rights reserved.

This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Robinhood Financial LLC provides brokerage services. Robinhood Securities, LLC, provides brokerage clearing services. Robinhood Crypto, LLC provides crypto currency trading. Robinhood U.K. Ltd (RHUK) provides brokerage services in the United Kingdom. All are subsidiaries of Robinhood Markets, Inc. ('Robinhood').

1476799