Blue Chip Stocks

What Are Blue Chip Stocks?

In the stock market, blue chip stocks are shares in large multinational companies with well-known names and long track records of growth and dividend payments. They got their name from poker, where blue chips are often the most valuable chips on the table.

Oliver Gingold, an employee of Dow Jones—the publisher of the Wall Street Journal and the creator of the Dow Jones Industrial Average (DJIA)—is also given credit for coining the term. Reportedly, in 1923 he was standing by the stock ticker machine at the brokerage firm that would become Merrill Lynch and noticed several trades at more than US$200 a share. He then said that he needed to go back to the office to "write about these blue chip stocks."[1]

While not always the best performers, blue chip stocks are favoured by risk-averse investors because of their dependability and generally perceived rock-solid reputation, especially during times of market turmoil. As a result, blue chips are often considered safe havens during market downturns. However, many investors keep them as a part of their long-term portfolios because of their safety, slow-and-steady growth and reliable dividend payments.

Characteristics Of A Blue Chip Stock

There is no set definition of what a blue chip stock is, but they generally share certain characteristics:

  • Large market capitalisations, such as Apple, Microsoft, JPMorgan Chase and Visa
  • Household names, such as Coca-Cola, Home Depot, Nike, Disney and Johnson & Johnson
  • Long history of growth, such as McDonalds, Procter & Gamble and Walmart
  • Long history of increasing dividend payments, such as Chevron, Exxon and Verizon

Generally speaking, the DJIA, which includes all of the above companies, is considered to include only blue chips.

Are Blue Chip Stocks Considered Safe?

Because of their size, market share, longevity, dividend payment histories and popularity with customers and investors, blue chip stocks are generally considered to be safe investments. However, many blue chip companies have failed to keep up with the times and customer tastes and found themselves left by the wayside. Think of companies such as Sears, KMart, Xerox and Kodak, which have lost their prominence.

GE Removal From Blue Chip Status

Indeed, being a blue chip doesn't guarantee that a company will always be one. The most recent example of a blue chip's fall from grace is General Electric,[2] whose corporate history dates back to Thomas Edison and the invention of the light bulb.

GE was an original member of the Dow in 1896 and was in it continuously since 1907 before it was removed in June 2018 after its stock lost almost half of its value in 2017 and fell another 25% in 2018 before it was booted out. GE was hit hard by the global financial crisis in 2008 and has yet to recover. It was replaced by Walgreens Boots Alliance.[2]

Other Companies Removed From Blue Chip Status

Lots of companies have been removed from the DJIA—thus losing their blue chip status—while nevertheless remaining strong companies whose stock is popular with investors. For example, Alcoa, AT&T, Bank of America and Hewlett-Packard are all former members of the index, as are Citigroup, General Motors, Honeywell and Kraft.

Summary

Blue chip stocks are a group of large, well-known multinational companies that are prized by investors for their long track record of safety, growth and dividend payments. The DJIA largely consists of blue chip stocks.