What Are Blue Chip Stocks?

A blue chip stock is one that is issued by a stable, well-established, and market leading company with a history of strong financial performance. They’re also often one of the largest companies in their industries, representing most of their markets’ size.

These stocks tend to be known for paying dividends on a regular basis, and are among the most popular investment choices for investors that are looking for high-quality stocks.

Most blue chip stocks are components of market indexes, such as the US Dow Jones Industrial Average (DJIA), the Standard & Poor’s (S&P) 500, the Nasdaq 100, Germany’s DAX, UK’s FTSE, and others.

Blue Chip Stocks Explained

There are different theories that explain how the “Blue Chip” term was coined. One group of analysts argue that the coin was first introduced in 1923 by Olivier Gingold, an employee of a company that is today known as Dow Jones. 

Gingold was monitoring the stock ticker at the brokerage company and saw that a number of stocks were trading at a high share price. He allegedly named those “blue chip stocks” to differentiate them from other stocks. Gingold also wrote an article on blue chip stocks. 

Some believe that the term was derived from the blue betting chips used in poker since they have the highest value of all colors. 

Today, blue chip companies are typically multinational corporations with an excellent reputation and consistent financial performances. Investors like to allocate their capital to these stocks because they add stability to their portfolios, as opposed to high-growth companies and startups that represent more risky assets to own. 

Blue chip companies are also the companies that are most likely to endure periods of economic turmoil and investing in them is often a method investors choose to protect themselves from inflation. Moreover, blue chip companies pay dividends regularly, providing investors with a stable source of income. 

Characteristics of Blue Chip Stocks

While there are no clear requirements that a company needs to meet to attain blue chip status, most of these companies have a market cap of at least $10 billion.

Blue chip stocks also tend to be very liquid because they are regularly traded by individual and institutional investors. Because of their status, they are far less volatile than other stocks and represent a perfect choice for conservative investors.

Thanks to their high liquidity, investors who need cash as soon as possible can easily sell their blue chip shares because there will more or less always be a buyer interested in purchasing these shares. 

Blue chip companies are also known for having strong fundamentals, with the most important ones including a high market capitalization ($10B+), conservative capital structure , and stable revenue growth

Even though regular dividend payments are not required to qualify for the blue chip status, most of these companies have been consistently paying dividends for a long time. The performance of blue chip companies can be monitored via the blue chip index, which tracks their performance

Famous Blue Chip Stocks

Here are some of the best known blue chip stocks:

IBM (NYSE: IBM) – International Business Machines Corporation is a U.S. technology company that develops integrated solutions through five main segments including Cloud & Cognitive Software, Global Business Services (GBS), Systems, and Global Financing.

The company was founded in 1911 in Endicott, New York, under the name Computing-Tabulating-Recording Company (CTR). In 1924, it was renamed International Business Machines Corporation (IBM). 

Today, the company operates in more than 171 countries, producing and selling computer hardware, middleware and software, as well as providing consulting and hosting services. Furthermore, IBM is a research giant, setting the record for most annual U.S. patents created by a company. 

Some of the company’s popular inventions include the automated teller machine (ATM) used by banks, the hard disk drive (HDD), the floppy disk, and the dynamic random-access memory (DRAM). 

IBM’s Cloud & Cognitive Software Solutions division develops integrated cloud, data, and artificial intelligence (AI) solutions. The Global Business Services segment offers consulting, business process, and application management services, while the Systems unit builds infrastructure platforms to handle hybrid multi-cloud and enterprise AI workloads.

IBM has a market cap of over $118 billion and is one of the largest employers around the globe.

Walmart (NYSE: WMT) – Walmart is an American multinational retailer and the world’s largest company by revenue. The company runs a retail and wholesale business that includes a chain of department stores, grocery stores, and hypermarkets across 24 countries under 48 different names. 

Walmart also operates warehouse clubs, cash and carry stores, discount stores, and eCommerce websites such as walmart.com, flipkart.com, and samsclub.com, among others.  The company has three main business segments: Walmart U.S., Walmart International, and Sam’s Club. 

Walmart was founded in Rogers, Arkansas in 1962 by Sam Walton, an American businessman, and entrepreneur. Today, Walmart has nearly 10,600 stores across several markets, including the U.S., Mexico, India (Flipkart Wholesale), as well as wholly-owned businesses in Chile, Canada, and South Africa.

Coca-Cola (NYSE: KO) – The Coca-Cola Company is a Georgia-based company that manufactures, markets, and sells non-alcoholic beverages. The company’s products include a selection of soft drinks such as water, juice, sports drinks, coffee, tea, dairy and plant-based drinks, energy drinks, and more.  

Its most popular product is Coca-Cola, a nearly 140-year old soft drink invented by pharmacist John Stith Pemberton. The company has a number of globally-known brands including Coca-Cola, Fanta, Sprite, Schweppes, Powerade, Del Valle, Aquarius, Fuze Tea, Ice Dew, and many others. 

Coca-Cola operates a franchised distribution system through which it produces syrup concentrate which it then sells to bottling companies around the world. It is the world’s largest non-alcoholic beverage company which sells products in more than 200 countries and territories. 

The Coca-Cola Company is a popular stock for investors and a component of the market indices DJIA, S&P 500 and S&P 100. 

Mastercard (NYSE: MA) – The Coca-Cola Company is a Georgia-based company that manufactures, markets, and sells non-alcoholic beverages. The company’s products include a selection of soft drinks such as water, juice, sports drinks, coffee, tea, dairy and plant-based drinks, energy drinks, and more.  

The company was founded by a group of multiple bankcard associations to compete with BankAmericard issued by Bank of America, today known as Visa credit card issued by Visa Incorporated.

Mastercard went public in May 2006, prior to which the company was a cooperative owned by over 25,000 financial institutions that issued Mastercard branded cards. 

Summary

Blue chip stocks refer to shares of well-run, financially robust companies with a great reputation among investors. Consistent financial performance and strategic execution help these companies to endure periods of market turmoil. 

Investors, especially those with a long-term investing horizon, are generally very open to having blue-chip stocks in their portfolios given the financial stability that these companies offer to their shareholders.

Updated 4/20/22

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