Stock market investing is often compared to gambling by those who don’t know the details of how it works. In reality, though, the two don’t have anything in common other than the term ‘blue chip’. In traditional poker, blue-coloured chips are the most valuable chips, and are used to make large bets.
Correspondingly, in investment portfolios, blue-chip stocks are often the most valuable in the equity asset class. But what are their defining characteristics, and should you buy them? Let’s understand the answers to these important investment questions.
Table of contents
1. What are blue-chip stocks?
2. What makes a stock blue-chip?
3. Why invest in blue-chip stocks?
4. The best blue-chip stocks to buy today
5. What should you keep in mind before investing in blue-chip companies?
6. How to invest in blue-chip US stocks?
7. Frequently asked questions
1. What are blue-chip stocks?
Blue-chip stocks are stocks of large, well-established companies that have a long-standing, stable financial record. These companies are usually the leaders in their respective industries, with a large market share and market cap. They are not only well-regarded for successful operations and financial stability in the stock market, but are typically also well-known brands with a spectacular growth history. Think Apple, Coca-Cola, Nike, Procter & Gamble, Infosys, and Reliance Industries Ltd.
Let’s take a look at some of the key features of blue-chip stocks so that you can identify them and use them to benefit your investment portfolio.
2. What makes a stock blue-chip?
Here are some common characteristics of blue-chip stocks:
2.1 Large market capitalisation
Companies whose stocks are blue-chip will always have large market capitalisations (the market capitalisation or ‘market cap’ of a company is the market value of its outstanding shares). Such companies tend to have market caps of over $10 billion, although this can differ across industries.
An important thing to note is that while large-cap stocks and blue-chip stocks have quite a few similarities, they are not the same. While effectively all blue-chip stocks are large-cap, not all large-cap stocks are blue-chip stocks. That’s because in addition to a large market cap, there are certain other attributes that give a stock the blue-chip status.
2.2 Growth history
Blue-chip companies (i.e. companies whose stocks are blue-chip) have an excellent growth history and significant brand value because of a portfolio of solid products and services. In other words, these are established companies that have a proven track record of performing well and remaining stable through different economic and market cycles.
Blue-chip companies are often those that have demonstrated the ability to adapt to changing consumer needs and market conditions, maintain a competitive edge, generate stable profits, and function in a socially responsible way.
2.3 Presence on a market index
Blue-chip stocks are often important constituents of major market indices such as the S&P 500, the Dow Jones Industrial Average, and the Nasdaq in the US. In India, blue-chip stocks would form a part of indices like the Nifty 50 and Sensex.
Such market indices tend to carefully select large, influential companies; thus, being a constituent of such indices is indicative of financial stability and performance potential.
2.4 Dividends
Blue-chip stocks tend to have a history of paying regular dividends to their shareholders. Typically, only well-established companies that have already reached a certain level of growth can pay sustainable dividends, as such companies don’t need to reinvest the entirety of their profits back into the company to fund their growth.
Hence, blue-chip stocks are attractive to investors who want to earn a regular income off their investments, in addition to benefiting from capital appreciation.
3. Why invest in blue-chip stocks?
In the course of discussing what blue-chip stocks are and how to identify them, we have already implicitly seen some of their benefits as well. But let’s take a more detailed look now at all the reasons you should consider investing in them:
3.1 Stability and diversification
Since blue-chip companies are industry leaders and well-established, they are less vulnerable to market and economic downturns as compared to non-blue-chip companies. Hence, they also serve as good options to diversify your portfolio and hedge against market volatility.
3.2 Dividend income
Blue-chip companies tend to earn stable profits, rely less on debt, and are already established. Hence, they can distribute a large portion of their profits as dividends to shareholders on a regular basis. So, if you are looking to add dividend-paying stocks to your portfolio, blue-chip stocks can be a good pick.
3.3 Capital appreciation
In addition to dividend income, blue-chip stocks exhibit consistent capital appreciation over the long term, owing to their well-established and proven business models and large market shares. So if you hold blue-chip stocks for a long time, you can benefit from not just regular dividend income but also potential capital appreciation.
3.4 Liquidity
Liquidity is the ease with which you can convert your assets into cash; in the context of stocks, it refers to how easily you can sell your stocks without having to compromise on prices. When it comes to blue-chip stocks, they tend to be highly liquid because there are almost always buyers in the market for such stocks.
Now that you know the main reasons to add blue-chip stocks to your portfolio, let’s take a look at a list of blue-chip stocks you should consider.
4. The best blue-chip stocks to buy today
Many of the biggest and best-performing companies in the world are US-based, so it’s no surprise that the top blue-chip stocks are also American. Here’s a list of blue-chip US stocks to buy as of July 2023, according to Forbes:
4.1 Apple Inc (AAPL)
With a market cap of over $2.5 trillion (as of September 2023), Apple is the world’s largest public company. Founded in 1976, it has become synonymous with innovation in the technology industry and is currently one of the world’s most profitable companies. Year-to-date (YTD), Apple’s stock is up by over 40.96%.
4.2 Walmart Inc (WMT)
Walmart is one of the world’s largest retail companies, and has about 10,500 stores globally. With a market cap of over $420 billion (as of September 2023), it also has a stellar track record of paying dividends to its shareholders — it has increased its annual dividend every year since 1974. Walmart’s stock is up about 14.57% YTD.
4.3 Johnson & Johnson (JNJ)
Johnson & Johnson, with a market cap of over $300 billion (as of September 2023), has a very strong portfolio of well-diversified products across sectors like pharmaceuticals, consumer products, and medical devices. Its R&D budget is also one of the largest among pharma companies. YTD, its stock is down by 8.20%.
4.4 Procter & Gamble Co (PG)
Walk into any grocery store, and it will be filled with products made by Procter & Gamble — Tide, Pampers, Vicks, Oral-B, Head & Shoulders, Gillette, and more. Over the last five years, its stock has outperformed not only the S&P 500’s returns but also its peers in the Consumer Staples Select Sector SPDR Fund, with its stock price more than doubling (when considering dividend reinvestment). YTD, the stock is up by 0.30%.
4.5 Coca-Cola Co (KO)
For over a century now, Coca-Cola has been the leader in the beverage industry globally, and currently (as of September 2023) has a market cap of $252.11 billion. It’s also one of the top dividend-paying stocks in the market, because it has a consistent track record of increasing its annual dividend payments. YTD, Coca-Cola’s stock is down 7.39%.
4.6 AbbVie Inc (ABBV)
AbbVie is a pharma giant, best known for its drug Humira, which is used to treat autoimmune diseases like rheumatoid arthritis and psoriasis. Its market cap is $263.46 billion (as of September 2023), and its dividend yield of about 3.79% is higher than the industry average of 2.15%.
4.7 Nike Inc (NKE)
Nike is the world’s largest sportswear brand based on both sales and popularity, and currently (as of September 2023) has a market cap of $147.34 billion . For the fiscal year 2022, Nike’s revenue was $46.7 billion, and the demand for its products continues to surge. YTD, its stock is down about 18.91%.
4.8 Honeywell International Inc (HON)
Honeywell International, with a market cap of $125.63 billion (as of September 2023), is a software industrial company, with operations across sectors like aerospace, home and building technologies, and performance materials and technologies. It has a strong dividend payment history, and YTD its stock is down 11.71%.
In addition to these blue-chip US stocks, other blue-chip stocks include JPMorgan Chase & Co., Goldman Sachs Group Inc., Microsoft Corp., and Meta Platforms Inc. As for the Indian markets, some of the best domestic blue-chip stocks include Tata Consultancy Services, Reliance Industries, Infosys, HDFC Bank, and Nestle India Ltd.
5. What should you keep in mind before investing in blue-chip companies?
While blue-chip companies are considered safe given their excellent track records and robust business models, it’s important to remember that they also carry risks (like all investments). Since they are part of the stock market, blue-chip stocks are also vulnerable to volatility that may be triggered by a range of micro- and macro-economic factors. Hence, it’s not advisable to only include blue-chip stocks in your portfolio — diversification remains important.
Additionally, if you have a higher risk appetite, you should also look at mid-cap and small-cap stocks that may have greater growth potential than blue-chip stocks that are already well-established.
Finally, when investing in the stock market through instruments like mutual funds and ETFs, make sure that there isn’t too much overlap in their constituent stocks, as most funds will include blue-chip stocks. You want to make sure to avoid overexposure to the same blue-chip stocks.
6. How to invest in blue-chip US stocks?
Investing in the US market is an excellent way to benefit from regular dividend income, potential capital appreciation, and the stability provided by the best blue-chip stocks. And to do this in a simple, quick, and cost-effective manner, Appreciate is your best bet.
With Appreciate, you can invest in blue-chip US stocks in just a few clicks, and can also make use of helpful investing tools and features such as systematic investment plans, change saving, and fractional investing. Since most blue-chip US stocks are priced quite high, the fractional investing feature can come in handy, as it allows you to add stocks like Apple and Meta to your portfolio with as little as ₹1. Download the App today!
7. Frequently asked questions
7.1 Which blue-chip stocks pay the highest dividends?
Most blue-chip stocks are known to pay regular dividends to their shareholders. Some blue-chip stocks that have a consistent track record of paying high dividends are Apple, Nike, and Coca-Cola.
7.2 What are the best blue-chip stocks to buy today?
Some of the best blue-chip stocks to buy as of July 2023 include Apple, Walmart, Johnson and Johnson, Nike, Coca-Cola, JPMorgan Chase & Co., and Honeywell International, according to Forbes.
7.3 Is it worth it to invest in blue-chip stocks?
Whether or not blue-chip stocks are worth investing in depends on your investment objectives, risk appetite, and investment horizon. Over the long term, most blue-chip stocks do have the potential for consistent capital appreciation and do tend to provide stable dividends.
7.4 What is the safest blue-chip stock?
Blue-chip stocks are, almost by definition, safe stocks to buy as they represent financially strong companies with a proven track record. Hence, when investing in blue-chip stocks, it’s more important to consider your risk appetite and investment horizon — blue-chip stock investments are typically ideal for conservative investors with an investment horizon of five to seven years.
7.5 How do I choose a blue-chip stock?
When looking at a blue-chip stock to invest in, you should look at the corresponding company’s market cap, market share, dividend yield, and portfolio of products and services. Blue-chip companies that have a track record of increasing their annual dividend payments, have a diversified portfolio of goods and services, have high brand loyalty and market share, and are a constituent of popular market indices ought to be good investments.
