Beginner investors are often drawn to the big, household names — companies that have been around for as long as we can remember. Companies like Coca-Cola and Apple.
These companies are often known as “blue chip stocks,” and are understandably some of the most attractive investments out there. “There’s an element of safety to them because people are familiar with them and feel like they’re proven winners,” said Rob Greenman, chief growth officer at Vista Capital Partners.
Blue chip stocks can be a great addition to your investment portfolio, though as with any investment strategy, the execution plays a big part in its long-term success. Here’s everything you need to know about them.
What Are Blue Chip Stocks?
Blue chip stocks are shares of companies that you’ve definitely heard of. They’re usually popular names with a history and a proven track record of being stable, well-established, and dependable. They’re companies that have performed well over a long period of time. Think of blue chip stocks as companies like Coca-Cola, Boeing, Walmart, Disney, etc.
Blue chip stocks are part of an elite group. There is no official list but one easy way to identify a blue chip stock is to look at the Dow Jones Industrial Average. All of the 30 companies included in that list are generally considered blue chip stocks. In fact, the Dow is often referred to as a blue chip index, says Robert Johnson, a professor of finance at Creighton University.
Why Should You Have Blue Chip Stocks in Your Portfolio?
Blue chip stocks are usually solid picks to have in any investment portfolio since they have a proven track record of holding value and paying dividends. They’re great to have in any investment portfolio, but that’s not to say they should comprise your whole portfolio.
Diversification is a fundamental rule when setting up an investment portfolio. In other words, it’s important to spread out your investments across many types of stocks and bonds so your exposure to one single section of the market is limited. This protects you in case the market takes a downturn.
A good way to keep a diversified portfolio and invest in blue chip stocks is through a blue chip index fund or ETF. This allows you to get exposure to a wide range of stocks with just one purchase. Put another way: Index funds let you invest in multiple companies at once, instead of just individual stocks.
If you can’t decide which blue chip stocks to invest in, keep it simple and invest in an index fund.
Rather than trying (and failing) to pick single companies to invest in, index funds allow investors to buy into many companies at once. “We’re a huge fan of index funds, just because all the data suggests it’s really just a waste of time to pick the winners. Even the professionals get that wrong all the time,” Greenman said.
The SPDR Dow Jones Industrial Average ETF Trust is one of the most popular blue chip funds especially because of its low expense ratio, or fee.
Why Invest in Blue Chip Stocks?
The biggest benefit of blue chip stocks is their reliability. These companies are known to do well over the long term, even during market downturns.
“These are stocks that have some history behind them,” Greenman said. “They are safe bets compared to newer, riskier companies.”
Because they are so big, blue chip companies also tend to drive returns for the whole market, Greenman said. So by owning a collection of blue chip stocks, you’re owning a good representation of the entire market.
Plus, these companies also tend to pay steady dividends, which means blue chips could generate some solid investment income.
“Blue chip stocks arguably should play a role in anybody’s portfolio,” Greenman said.
List of Blue Chip Stocks
Here’s the current list of companies on the Dow Jones Industrial Average — which is a proxy for blue chip companies:
|AXP||American Express Co|
|CSCO||Cisco Systems Inc|
|GS||Goldman Sachs Group Inc|
|HD||Home Depot Inc|
|HON||Honeywell International Inc|
|IBM||International Business Machines Corp|
|JNJ||Johnson & Johnson|
|JPM||JPMorgan Chase & Co|
|MRK||Merck & Co Inc|
|PG||Procter & Gamble Co|
|TRV||Travelers Companies Inc|
|UNH||UnitedHealth Group Inc|
|VZ||Verizon Communications Inc|
|WBA||Walgreens Boots Alliance Inc|
|DIS||Walt Disney Co|