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In the stock trading world, you’ll often hear words and phrases that may not be familiar to you. As you become a more experienced trader, you can learn more about different terms that refer to various types of stocks, trades, and transactions. One example is blue-chip stocks, which refers to stocks from a large company that has a good reputation. Learn more about blue-chip stocks and which ones to consider adding to your own portfolio.

What Are Blue-Chip Stocks?

Blue-chip stocks are stocks that come from a big company that has an excellent reputation in the stock market. This type of company usually is well-established and financially strong. In order to qualify, a company often has been in operation for many years and typically pays dividends to its investors on a regular basis. Most companies with blue-chip stocks have market capitalization rates in the billions and fall within the top three companies within its industry or sector or may even be the market leader.

It’s also interesting to note that most blue-chip stock companies are well-known household names because of their success. A company that falls under this category will also have dependable earnings every year, so investing in one generally doesn’t come with a lot of risk. Of course, investing in stocks always comes with some risk, but dependable companies with strong financials and excellent track records tend to offer less risky investment opportunities.

  • Blue-chip stocks come from large companies with excellent financial backgrounds and strong reputations.
  • A blue-chip stock company is usually a market leader or within the top three companies within its segment.
  • Blue-chip stocks are less risky than other investments because they come from top organizations that have proven financial success.
  • Investing in blue-chip stocks requires more money upfront as they are more expensive than other options, but they often pay out dividends and offer the potential for high returns.
  • If you are interested in investing in blue-chip stocks, it’s helpful to review a list of some of the best options.

History of Blue-Chip Stocks

Before you start the process of investing in blue-chip stocks, you may want to better understand the history of the term and what makes a stock qualify under this category. Although blue-chip stocks don’t necessarily have to pay dividends every year, most do pay out stable or rising dividends on an annual basis. Many people in the industry believe that the term came from the game of poker, where blue chips are the most valuable. Blue-chip stocks are valuable additions to any investor’s portfolio.

Blue-chip stocks are traded on the major stock markets, such as the New York Stock Exchange or the NASDAQ. Although there are no specific criteria that make a company qualify as a blue-chip stock, certain benchmarks are generally accepted. One benchmark is a market capitalization of $5 billion or more, which shows that most blue-chip stock companies are extremely large. Some smaller companies are considered to offer blue-chip stocks. Most are sector or market leaders, even if they don’t meet the market capitalization benchmark.

The T. Rowe Price Blue Chip Growth Fund, valued at $64.2 billion, is a fund that aids in providing long-term capital growth to companies that qualify as blue-chip companies. Although it doesn’t outline specific guidelines for what organizations qualify for investments, the fund does focus more on mid-cap and large-cap businesses that hold a lot of clout and are established within their segments.

As mentioned, the risk that comes with investing in blue-chip stocks is a bit lower, although large companies have struggled during periods of stress, such as during major recessions. Most experts recommend including blue-chip stocks within your portfolio but not making them your entire investment strategy. A diverse investment portfolio should also include other types of stocks, along with other assets, such as cash and assets. Investors may also want to invest in mid-cap and small-cap organizations in addition to large-cap companies.

How to Invest in Blue-Chip Stocks

Now that you understand what qualifications are needed for a stock to be considered a blue-chip, you can look into some of the strategies for investing in these types of stock. You can find the most complete listing of stock options on the Dow Jones Industrial Average, which is a famous list that tracks the U.S. stock market’s health and stability. You can also review the Dow Jones Utility Average and Dow Jones Transportation Average, where you’ll find other companies considered to be blue-chips.

The next step is analyzing blue-chip companies to decide which ones you want to invest in and add to your portfolio. There are many different options to choose from across a wide range of industries and segments. When considering companies, some of the key factors to evaluate include:

  • Bond rating on debt
  • Interest coverage
  • Earning growth
  • Dividend payments

Some blue-chip companies are quite stable, while others offer the potential for higher returns due to growth projections. It is ultimately up to you what type of organizations you want to invest in and add to your portfolio, as well as how much risk you want to take on as you decide on your own investment strategy.

If you’re having trouble deciding on blue-chip companies to invest in, you may want to look into mutual or exchange-traded funds that focus on this type of stocks. An EFT is traded like stocks, while a mutual fund will offer an annual yield and come with some required yearly expenses.

It’s often helpful to work with an experienced broker when you’re considering investing in new companies or options. Brokers and brokerage firms can help you identify potential blue-chip companies that are worth investing in, as well as assist in the process of buying shares of the stock through the major exchange.

Blue-Chip Stocks List

As you consider blue-chip stocks, take a look at a few of the best options to invest in this year. Many of these combine the opportunity to receive dividends, have high growth potential, and are fairly stable. They can insulate a portfolio and increase the chance of higher yields on investments.

Johnson & Johnson

Johnson & Johnson is a consumer and health giant that most people have heard of and purchase from on a regular basis. For conservative investors, it’s a great company to choose because it has moved very little in the last few years, even when other stock values have shifted dramatically. It’s one of the most resilient stock options traded on the NYSE and has more than 10 different drugs that are currently in phase three of their clinical trials, which shows the potential for growth.

Comcast Corp.

Comcast Corp. is one of the leading communications and entertainment companies in the nation, and it’s also a stable company in which you may want to invest. It has rewarded its shareholders with a dividend of 2% in the recent past and uses less than 15% of its profits to pay back investors. The company recently acquired Sky, a European broadcasting company, for $39 billion as part of its plan to expand on a global scale. Comcast Corp. has also grown its revenue by 10-15% every year, making it a trustworthy company to consider.

Intel Corp.

If you’re interested in investing in a technology company that is stable, check out Intel Corp. This company manufactures chips that are used in many different electronic devices. It’s valued at $220 billion and trades at 11 times its earnings. Additionally, shareholders received a 2.5% dividend recently. Intel Corp. also offers a buyback program, which it just added another $15 billion to, making it a company worth investing in if you want to diversify your portfolio with a technology option.

Apple

Apple hasn’t always been considered to be a blue-chip company, but it’s certainly moved into that category in the last decade. The electronics company has diverse income streams from the iPhone, iPad, and Mac computers, high-margin services, and recurring revenue that comes from customers who continue to purchase the latest products. Apple also has over $230 billion in cash and paid dividends to its shareholders, helping to bolster its capital return program.

Caterpillar

Drive past a construction site and you’ll likely see equipment from Caterpillar, a major corporation that manufactures heavy-duty equipment. One thing to consider about this blue-chip stock is that its success ultimately depends on the economy, as the construction industry is cyclical in nature. However, Caterpillar did pay out a 2.6% dividend to investors recently and experienced an 18% revenue growth in the final quarter of 2018. As a result, the earnings per share increased by 63%.

If you’re interested in investing in some of the blue-chip stock opportunities, these companies offer the potential to receive dividend payouts and add value to your portfolio. Knowing how to invest can be an overwhelming process, which is why our experts at Raging Bull are here to help you learn more about trading and investing. Join a free webinar, schedule a one-on-one training session, or download a free e-book to get started.

Author:
Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

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