Should You Own Blue Chip Stocks?

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Blue chip stocks are the Old Faithfuls of the investing world. They don’t offer the meteoric growth of a hot startup or today’s most popular cryptocurrency, but instead give your portfolio steady returns over periods of time measured in decades. Like their poker namesake, blue chip stocks might just be the best investments in the game.

What Is a Blue Chip Stock?

A blue chip stock is an investment with a proven history of steady growth and staying power. There aren’t precise criteria that define blue chip stocks, but generally speaking they have the following characteristics:

• Longevity. Blue chip companies have usually been in business for decades. They have demonstrated the ability to survive and thrive through recessions and market downturns.
• Reliability. They have solid track records of good earnings and relatively steady performance over the very long term.
• Market capitalization. Blue chip companies are large-cap stocks—the total value of their outstanding shares is $10 billion or more. Blue chip stocks are represented in leading market indexes, like the S&P 500 and the Dow Jones Industrial Average (DJIA).
• Dividends. Blue chip companies have relatively low levels of debt and excellent cash flow. They tend to reliably return some of this cash flow to their shareholders in the form of regular dividend payments.
• Name Recognition. If you invest in a blue chip stock, chances are you’re putting your money into a company you would instantly recognize. That doesn’t always speak to something being a good investment, but it does illustrate the sheer space these companies occupy in the market and popular culture.

Why Invest in Blue Chip Stocks?

If you’re new to investing, blue chips can be an excellent way to begin investing in the stock market. Before you buy, however, get to know the advantages and downsides you should understand:

Advantages of Blue Chip Stocks

• Stability. Blue chip companies have been in operation for decades. While smaller and newer companies may struggle to cope with recessions and market changes, blue chip stocks are usually able to survive and continue to deliver returns.
• Dividends. Since blue chip stocks usually pay dividends, you can receive steady and reliable income, making them particularly appealing to income investors and retirees. Even if you aren’t investing primarily for income, by using a dividend reinvestment plan (DRIP), you can automatically turn these earnings into more shares of your blue chip stock, letting compounding returns grow even faster.
• Minimal Effort. Because blue chip stocks aren’t as volatile as other securities, they don’t require as much oversight, management or worry. If you’re a passive investor who just wants to set it and forget it, blue chip stocks can be invaluable.

Downsides to Blue Chip Stocks

• Cost. Since blue chip companies are well established, their share prices tend to be higher than you’d pay for smaller or newer stocks. For instance, shares of Amazon (AMZN), a leading blue chip stock, came in at over $3,300 as of Nov. 2, 2021. That said, you can now buy fractional shares of many blue chip stocks at brokerages like Charles Schwab, Fidelity, Robinhood and Stash.
• Potentially Lower Returns. Because blue chip companies have been in business for quite some time and already command high share prices, you probably won’t experience exponential growth over the short term. Instead, you’ll see steady, but perhaps much less exciting, returns build over years and decades.

Best Blue Chip Stocks

Blue chip stocks can be found every market sector, from healthcare and consumer goods to technology and manufacturing. There are hundreds of blue chip stocks, but these five are some of the most well known.

1. Apple (APPL): Maker of all things iOS, Apple has become a mainstay of the technology sector and has a 27% 10-year trailing return. In November 2021, it paid dividends of $0.22 per share.
2. Coca-Cola (KO): The Coke giant’s 10-year trailing return was 7.65% as of November 2021. In September, it paid dividends of $0.42 per share.
3. Johnson & Johnson (JNJ): Pharmaceutical company Johnson & Johnson’s 10-year trailing return is 13.61% as of November 2021. In August, it paid dividends of $1.06 per share.
4. Microsoft (MSFT): Software behemoth Microsoft provided a 10-year trailing return of 29.48% in November 2021 and made dividend payments of $0.56 per share in August.
5. Walt Disney Company (DIS): An entertainment conglomerate that operates movie studios, theme parks, cruise lines and more, Disney offers a 10-year trailing return of 18.37%. It suspended dividend payments in 2020 due to the coronavirus pandemic.

*Trailing returns and dividend payments are current as of Nov. 2, 2021.

Note that almost all of these blue chip stocks offer regular dividend payments, even through the most recent economic downturn, and that they have generally exceeded, or at least come close to, the S&P 500’s trailing 10-year returns of about 16% during the same period.

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How to Buy Blue Chip Stocks

You can buy blue chip stocks as individual stocks or through funds that contain tens or hundreds of stocks. Investing in individual shares of blue chip stocks comes with greater risk than investing in diversified mutual funds and exchange-traded funds (ETFs).

Read More: How To Buy Stocks

While blue chip companies have demonstrated histories of weathering market ups and downs, concentrating your money in just a few could still leave you vulnerable to unexpected dips—as well as mean you miss out on potential large gains from other companies.

If you’re looking for diversified blue chip funds, consider one of these three to start:

• Fidelity Blue Chip Growth Fund (FBGRX) invests 80% of its holdings in blue chip stocks. These tend to be from companies with medium to large market capitalizations that Fidelity Management & Research believes have higher-than-average growth potential.
• Invesco QQQ (QQQ) tracks the performance of the Nasdaq 100, an index that includes 100 of the largest non-financial companies listed on the Nasdaq exchange.
• Vanguard Dividend Appreciation ETF (VIG) strives to duplicate the performance of the S&P U.S. Dividend Achievers Select Index. This index includes companies who have raised their annual dividend payments for at least 10 years, a similar approach to funds that model the S&P 500’s dividend aristocrats.

Even if you don’t opt for one of these funds, keep in mind the companies they own and indexes they track. This can help you narrow down other blue chip funds and stocks that may be worthy of your investment dollars.