What are blue chip stocks and are they right for you?
Regardless of your investing experience, chances are you’ve heard the term ‘blue chip stocks’ used to describe certain securities on the stock market. Blue chips are associated with the largest and most successful companies in the world. So, what makes a company blue chip, and are they the right investment for you? Read on to find out.
What is a blue chip stock?
Blue chip stocks are typically associated with well-established and financially sound companies. Often, blue chip companies have proven track records of economic stability, consistent performance and tend to be resilient to market volatility.
Many investors look at blue-chip shares as a ‘safe investment option’ due to their typically reliable returns, typical longstanding dividend payments and excellent reputations.
When used as part of a broad investing strategy, blue chips can be excellent additions to a diversified portfolio. However, like any investment, there is always an inherent risk when investing in the stock market. It’s always advisable to take personal circumstances and risk tolerance into consideration before investing.
What does blue chip mean?
Share market context
The term ‘blue chip’ can be traced back to Oliver Gingold, a long-term staffer at Dow Jones & Co.
The apparent story is that Mr Gingold coined the term after noticing several trades occurring at US$200+ a share, referring to them as ‘blue-chip stocks’. The term has been in circulation ever since. While originally used to describe premium-priced investments, today, it’s more commonly used to describe high-quality stocks.
A colourful reference
In the world of poker, different coloured chips are used to place bets with blue chips historically given the highest denominational value. It is this association that Oliver Gingold was likely referring to when applying the term to high-priced securities.
What makes a stock blue chip?
As mentioned, blue chip stocks are considered to be high-quality and reliable investments. These companies are often household names and industry leaders with a proven track record of stability and growth over a long-term period.
As there are no strict parameters in defining a blue chip company, it’s best to look at some of the critical characteristics that are commonly found in well-renowned blue chip stocks.
Financial stability
Blue chip stocks typically belong to stable companies with a demonstrated propensity for resilience against market downturns.
A blue chip company is usually able to mitigate fluctuations in a broader market context with a large market cap.
Other factors contributing to financial stability include admirable balance sheets, impressive cash flows and observable revenue generation.
Growing dividends
Another common characteristic of a blue-chip stock is consistent and growing dividends. This is primarily due to the fact that rising dividends are a mark of a financially sound company with growing revenue.
Established companies that are classified as ‘blue-chip’ will often implement a higher-than-usual dividend yield rate. It should be noted that not all blue chip stocks pay dividends, with some large-cap companies choosing to reinvest their profits and fuel further growth.
Reputation
A blue chip company is usually well-known among the general population and is typically considered to be an industry leader. They are often household names with a stellar reputation among financial stakeholders and the general public.
Examples of blue chip companies
Blue chips can be found in all manner of industries across the ASX and Wall St, including financial services, consumer discretionary and materials. See below for five examples from each market.
Blue chip shares on the ASX
1. BHP Group Limited ($BHP)
Market capitalisation (as of 10/11/2023): $227.84b
Stock price (as of 10/11/2023): $45.26
Sector: Materials
BHP Group is a well-established mining and resources conglomerate with operations stemming around the world including Australia, Africa, Asia, North America and South America. Incorporated in 1885 as the Broken Hill Proprietary Company, the company specialises in a variety of sectors including copper, coal, nickel, zinc, oil and gas, iron ore and more.
Though founded over 130 years ago, BHP Group has consistently updated their processes to align with sustainable practices with a stringent focus on a greener, brighter future.
2. Commonwealth Bank of Australia ($CBA)
Market capitalisation (as of 10/11/2023): $171.08b
Stock price (as of 10/11/2023): $101.26
Sector: Financials
Commonwealth Bank of Australia is one of the premier and largest financial services providers in the country. Founded over 100 years ago, the bank provides a wide breadth of financial products and services catering to banking and investing.
3. National Australia Bank Limited ($NAB)
Market capitalisation (as of 10/11/2023): $90.55b
Stock price (as of 10/11/2023): $28.42
Sector: Financials
The National Australia Bank (NAB) is known as one of Australia’s ‘big four’ banks. The company provides a full slate of financial services to its clients including personal, business, corporate and institutional banking. NAB has a strong history with Australian businesses with a particular focus on small and medium-sized businesses.
4. CSL Limited ($CSL)
Market capitalisation (as of 10/11/2023): $121.87b
Stock price (as of 10/11/2023): $252.85
Sector: Health Care
Commonwealth Serum Laboratories (CSL) is an internationally recognised biotechnology company that specialises in researching and developing innovative medicines. Founded in 1916, CSL Limited provides lifesaving products to patients in over 100 countries around the world with over 32,000 employees.
5. Fortescue Metals Group ($FMG)
Market capitalisation (as of 10/11/2023): $72.2b
Stock price (as of 10/11/2023): $23.74
Sector: Financials
Fortescue Metals Group (FMG) is an Australian-born minerals and mining company with a particular specialisation in the exploration, production, development and sale of iron ore. The company is one of the lowest-cost iron ore producers and delivers an average of 190 million tonnes of iron ore annually.
💡Related: Are these the best blue chip shares on the ASX?→
Blue chip shares on Wall St
1. Apple, Inc. ($AAPL)
Market capitalisation (as of 09/11/2023): $2.84t
Stock price (as of 09/11/2023): $182.41
Sector: Consumer electronics
Apple is an American technology company that specialises in the designing, manufacturing and marketing of some of the world’s most popular consumer electronics. Founded in 1976 by Steve Jobs and Steve Wozniak, the household name is responsible for the release of products including the iPhone, iPad, and Mac computers.
2. Berkshire Hathaway Inc. Hld B ($BRK.B)
Market capitalisation (as of 09/11/2023): $754.21b
Stock price (as of 09/11/2023): $348.18
Sector: Diversified holding companies
Berkshire Hathaway is a Warren Buffet-led multinational conglomerate holding corporation that was founded in 1839. Considered to be one of the most successful companies in the world with its share price often being touted as a bellwether for the market as a whole. Berkshire Hathaway currently owns and manages a wide range of companies across multiple sectors including retail, insurance, energy and more.
3. MasterCard Inc. ($MA)
Market capitalisation (as of 09/11/2023): $365.45b
Stock price (as of 09/11/2023): $387.96
Sector: Consumer finance
MasterCard is an American financial services company that was founded in 1966. At its core, Mastercard operates a global payment platform that allows consumers and businesses to make payments and conduct transactions electronically.
The company also produces credit, debit and prepaid cards that are distributed all around the world.
4. The Coca-Cola Company ($KO)
Market capitalisation (as of 09/11/2023): $246.82b
Stock price (as of 09/11/2023): $56.66
Sector: Non-alcoholic beverages/drinks
Coca-Cola is perhaps the most famous beverage company in the world and operates in over 200 countries. Notably famed for its flagship carbonated soft drink ‘Coca-Cola’, the company also owns and produces a wide range of nonalcoholic beverages including Fanta, Sprite and more.
5. McDonald's Corp. ($MCD)
Market capitalisation (as of 09/11/2023): $194.02b
Stock price (as of 09/11/2023): $266.91
Sector: Restaurants
The McDonald’s Corporation is an American-owned fast food company founded by the McDonald brothers, Richard and Maurice, in 1940. The company owns and operates a global chain of over 38,000 restaurants in over 100 countries. Renowned for burgers, fries and other specialty items, the iconic company is considered to be one of the trailblazers of modern fast food.
💡Related: Discover 10 popular U.S. blue chip stocks→
What are the advantages of blue chip stocks?
Depending on your investment objectives, blue chip stocks can offer unique advantages over smaller companies. Here are a few of the reasons investors buy blue chip shares.
General stability
A blue chip company will often have a longer operating history and strong financial foundations that appeal to many investors who are seeking a viable long-term investment. Blue chips have a tendency to weather economic downturns and, in some instances, provide market beating returns to investors.
Please note, while blue chips generally provide more stability than smaller companies, they are not immune to price fluctuation and suffering a decline in value.
Reliable diversification
Buying blue chip stocks can be a great way to diversify a portfolio. Considering blue chips can exist in a variety of sectors and industries, investing in a diverse range of reliable companies with strong balance sheets and modest debt can offset potential downturns in particular sectors.
Decent liquidity
Blue chips tend to have more buyers and sellers which increases liquidity thus making it easier for investors to buy, sell or trade their positions more easily.
Propensity for higher dividends
While paying dividends is not necessarily a requirement for blue chips, the ones that do have a tendency to offer higher dividend yields than other stocks. This makes certain blue chips an excellent option for those looking for regular income.
What are the risks of blue chip shares?
Like any financial instrument, investing in blue chips can carry risks of capital loss and aren’t immune to market fluctuations and unprecedented shifts in the market.
Global events that impact a particular industry or sector could have negative consequences on share price. For instance, the 2020 pandemic caused disruptions across the global economic landscape that had rolling impact on most industries and individual stocks, including blue chips.
It’s always wise to conduct your own research and take your own financial situation into account before investing in blue chip shares or any other stock.
How do I buy blue chip companies in Australia?
If you’re looking at investing in blue chips, you’ll need to open a brokerage account with an investing platform like Stake. It only takes a few minutes to sign up for a Stake account, all you need is some I.D.
After opening an investing account, you can then begin researching the blue chips you may wish to invest in. A good place to kickstart your research is online through financial news outlets or even on our own Stake Academy.
Once you’ve determined the blue chip share you want to invest in, it’s simply a matter of depositing funds into your account and selecting the order type.
After your order has been filled you’ll be the owner of your first blue chip stock. After purchasing, it’s important to keep a steady eye on the performance of the investment to monitor for adverse changes.
What blue chip ETFs are there in Australia?
There are a number of exchange-traded funds (ETFs) listed on the Australian Securities Exchange (ASX) that give investors exposure to blue chips both in Australia and overseas.
Younger investors and those who are just starting out in their investing journey may be overcome by choosing just one company to invest in – even with blue chips.
This is why investing in blue chip ETFs can be a viable alternative. These instruments can give investors immediate exposure to several sectors with a single trade fee.
ETFs can also track different markets, for instance, the Vanguard Australian Shares Index ETF ($VAS) seeks to track the performance of the top 300 ASX-listed companies.
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Frequently asked questions
Investing in a blue chip stock carries the same inherent risk as all stock investments. There are risks and considerations to take into account, including personal financial circumstances, risk tolerance, and your overall investment goals.
Many investors will choose a blue chip stock due to their reputation as being stable investment option. Often, the underlying company will be a household name with a measurable record of stability, growth and have a demonstrated resistance to economic downturn.
Investors also select these options as a means of diversifying their portfolio with high-performing companies in different sectors and industries.
No, not all blue chips pay dividends to shareholders. A large portion of blue chips do offer dividends, but it is at the behest of the individual company.
This does not constitute financial product advice nor a recommendation to invest, it is for informational purposes only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking appropriate financial or taxation advice from a licensed adviser before investing.
Megan is a markets analyst at Stake, with 7 years of experience in the world of investing and a Master’s degree in Business and Economics from The University of Sydney Business School. Megan has extensive knowledge of the UK markets, working as an analyst at ARCH Emerging Markets - a UK investment advisory platform focused on private equity. Previously she also worked as an analyst at Australian robo advisor Stockspot, where she researched ASX listed equities and helped construct the company's portfolios.
