What Are Blue Chip Stocks?

Blue chip stocks are stocks of well-established companies that have stable earnings and are without extensive liabilities. Blue chip stocks are traditionally regarded as more likely to earn profits than most other stocks, regardless of the market conditions at the time. While they may not always earn as much profit as some of the other stocks, they are consistent performers, which makes them an important part of any investment strategy.

Which Stocks Are Blue Chip Stocks

While most investors can agree on what a blue chip stocks is, there is some disagreement on which currently existing stocks are truly blue chips stocks. Most professional investors have their own positions on the matter, so each investor should be free to try to figure that out on her own. Investors make those decisions by examining the companies that issue stocks using the following criteria:

  • Longevity--The company has been in business of several decades and has an established record of earning profit without suffering significant losses every step of the way.
  • Uninterrupted dividend payments--The company has been able to make dividend payments to its stock holders without any interruption for as long as it has existed.
  • Ongoing profitability--The company has been able to increase dividend payments for each share on a regular basis.
  • Sound finances--The company has strong balance sheets with a moderate debt burden.
  • High credit rating--The company maintains high credit ratings in the bond and commercial paper markets.
  • Larger-than-average scale--The company is larger than American businesses in general in terms of revenue and market capitalization.
  • Diversity--The company offers a wide variety of products and/or has a large number of geographic locations.
  • Competitive advantage--The company has been able to do better in the marketplace than similar companies thanks to things like making cost efficiencies, controlling distribution and maintaining the value of their franchises.

Benefits of Owning Blue Chip Stocks

The blue chip stocks offer a number of benefits to the investors. First and foremost, blue chip stocks offer stability few stocks can match. Blue stock companies have been around for decades, surviving economic downturns, market bubbles and recessions that bankrupted hundreds of other companies. While no company is ever truly immune from financial problems, blue chip companies are far more likely to continue to endure. This means that the investors who bought blue chip stocks can take comfort in the fact that they will make profit. It may not always be that large (especially in the economic climate of 2010), but it will be there, offering the investors some source of income even when other investments fail.

Another major benefit of owning blue chip stocks is their predictability. Because they have been around for so long, investors can look at their performance history and predict how they will react to a wide variety of economic conditions. This, in turn, helps them anticipate how blue chip stocks will perform in the future and make their investment decisions accordingly.

Investing in Blue Chip Stocks

Investors can either purchase blue chip stocks directly or buy shares in mutual funds that specialize in blue chip stocks. In the later case, the investors may hire brokers--financial professionals who make day-to-day investment decisions on the investors' behalves, freeing them from the need to monitor the stock markets every day of the week. A good broker will have enough experience and resources to manage blue-chip stocks effectively. It is worth noting that the investor has the ultimate authority over the fate of his or her blue chip stocks, and the broker cannot overrule the investor.

Blue chip stocks tend to be more expensive than other stocks, so investors should be very careful about which stocks they purchase and how many of those stocks they purchase at a time.

blog comments powered by Disqus
Scottrade