Blue chips: all you need to know about these ruling stocks

Imagine investing in a company that is stable, profitable, and has a long-standing reputation for success. This company has a proven track record of providing consistent returns to its investors and is known for weathering economic storms. Such companies are known as "blue chip" stocks, and they represent some of the most dominant and successful businesses in the world.

But what exactly are blue chip stocks, and why are they so highly valued? In this era of ever-changing market trends and unpredictable economic conditions, blue chip stocks have become a reliable investment option for many investors seeking long-term gains. Whether you are a seasoned investor or just starting in the world of finance, understanding blue chip stocks and their role in the market is crucial. Let's jump right into it.

What are blue chips?

Blue chip stocks are the shares of large, established, financially sound companies that have a strong reputation for stability, profitability, and reliability. These companies are considered leaders in their respective industries, with a long history of success and a track record of steady growth. When evaluating whether a company is a blue chip stock, there are three main aspects to consider:

• How well-known are they: They are usually popular and/or unique brands with a strong presence in their respective markets. They are typically household names that are recognized and trusted by consumers.
• How secure are they: Mostly they are financially secure and have a strong balance sheet, with a low level of debt and consistent profitability. They are less susceptible to economic downturns and are able to weather market fluctuations.
• How established are they: They have a long history of success and stability, having been renowned in business for many years. They typically have a large market capitalization and are leaders in their industry, with a dominant market share.

Blue-chip companies are usually recognized for their dominance in their respective industries, typically through their extensive market share and well-known brand. While there is no official register of blue-chip stocks, the 30 companies listed in the Dow Jones Industrial Average (DJIA) are often regarded as examples.

Among the well-known companies in the DJIA that are commonly regarded as blue-chip stocks are Caterpillar, Coca-Cola, Amazon, Apple, Goldman Sachs, Boeing, Intel, Exxon Mobil, McDonald's, Microsoft, Nike, Visa, Walmart, and Walt Disney. The market capitalization of these blue-chip companies is considerably high, which reflects the total worth of the company calculated by multiplying the current stock price with the number of stocks. Market cap levels for blue-chip companies can run into billions, and even trillions. In 2018, Apple became the first company to hit a trillion-dollar valuation, making headlines across the world.

You might also be interested in: Chinese stocks: Guide to investing in China's booming market

The most important characteristic of a blue chip company

The most critical feature of a blue-chip company is its stability, which is achieved through consistent profitability, financial security, and a long-standing reputation for success. These companies are leaders in their industries, typically with a large market share, and are recognized for their well-known brand and established track record. Blue-chip companies are considered a low-risk investment asthey seem to be less susceptible to economic downturns and market fluctuations compared to other companies. As a result, they are usually favored by investors seeking long-term, reliable returns. However, it's important to note that even blue-chip companies are not immune to market risks and economic cycles. Investors should conduct thorough research, diversify their investment portfolios, and consider their risk tolerance and investment objectives before making any investment decisions.

Why trade blue chips stocks?

There are several reasons why trading blue-chip stocks could be an attractive investment strategy:

1. Stability: Blue-chip companies are renowned for their stability and reliability. They are typically large, established companies with a proven track record of consistent profits and a strong market position. As a result, they are less susceptible to market fluctuations and economic downturns, making them a lower-risk investment.
2. Liquidity: Blue-chip stocks are often highly liquid, meaning they can be easily bought and sold without impacting their market price. This makes them a popular choice for investors who want to trade frequently or need to move in and out of positions quickly.
3. Dividends: Many blue-chip companies pay out dividends to their shareholders, which can provide a steady income stream in addition to any potential capital gains.
4. Long-term potential: Blue-chip stocks have a long history of success and stability, and many investors view them as a reliable long-term investment. They can provide consistent returns over time, which can be especially attractive for investors looking to build wealth over a longer period.

Related: Day trading strategies in 5 minutes + trading quiz

Top 10 blue chips stocks?

1. Johnson & Johnson (JNJ):

Johnson & Johnson (JNJ), is a prominent healthcare and consumer goods company established in 1886. With a track record of delivering healthy stock performance, Johnson & Johnson's debt has been assigned a perfect AAA rating by credit rating agencies, indicating a very low risk of default. Currently valued at approximately $396.62 billion as of 30th August 2023, the company pays a dividend of 2.9%, which is more than twice the rate of U.S. 10-year Treasuries, making it a high dividend blue-chip stock.

Johnson & Johnson, whose financial performance often serves as an indicator for the broader health industry, has reported a 5.6% increase in sales for the first quarter of this year (2023) in contrast to the same timeframe in the previous year. Also, In light of its strong performance in 2022, Johnson & Johnson has received approval from its board to raise its quarterly dividend by 5.3% to $1.19 per share.

2. Berkshire Hathaway (BRK.B):

Under the notable investor Warren Buffet, Berkshire Hathaway has become widely recognized. Similar to Johnson and Johnson, Berkshire Hathaway has demonstrated an impressive level of stability over time. Its diverse portfolio includes holdings in insurance (such as Gen Re and GEICO), railroads (BNSF Railway Co.), utilities, and other industries, which further strengthens its financial position. With its well-diversified holdings and Buffet's careful investment approach, it appears that it would take a catastrophic global economic event to significantly impact Berkshire Hathaway's solid financial position.

3. JPMorgan Chase & Co. (JPM):

JPMorgan Chase & Co. (JPM) holds the distinction of being the largest bank in the United States. The company boasts a 2.87% dividend yield in 2023. The company is projected to earn $35 billion in 2023 with some analysts expecting it to go as high as $41 billion.

4. 3M (MMM):

Founded in 1902, 3M is a well-diversified and stable company, which is why it has earned a spot on our list of blue-chip companies. As an industrial giant, 3M produces a variety of products, including respirators, automotive parts, personal protective equipment, and technology for other essential sectors of the economy. Their goal is to generate 30% of their revenue from products that have been launched within the last four years, and they allow their employees to spend 15% of their paid time on personal projects. They currently pay an annual dividend of 5.79%.

5. AbbVie (ABBV):

AbbVie (ABBV) is a pharmaceutical company that focuses on developing and marketing drugs for the treatment of serious health conditions. Some of their primary areas of focus include immunology, oncology, neuroscience, and virology. Analysts predict it to grow earnings and revenue by 10.8% and 3.7% per annum respectively. It currently pays a 3.90% annual dividend yield.

6. The Walt Disney Co. (DIS):

The Walt Disney Company (DIS) is a diversified multinational mass media and entertainment conglomerate. It operates through its various subsidiaries and divisions, which are involved in a range of entertainment and media businesses, such as media networks, parks and resorts, studio entertainment, consumer products, and interactive media. At the start of 2023, Disney's price was $86.88. Some analysts predict that the price of Disney may go as high as $123 by the end of 2023.

7. AT&T (T):

AT&T (T) is a multinational telecommunications conglomerate that provides wireless and wireline telecommunications services, including internet, video, and voice services. The company also operates media and entertainment businesses, including WarnerMedia, which produces and distributes films, TV shows, and digital content. Some analysts predict the price of AT&T (T) may reach around $22 this year. The company currently pays an annual dividend yield of 6.48%.

8. Cisco Systems (CSCO):

Cisco Systems (CSCO) has been continuously enhancing its service platform by adding new capabilities in recent years. The company has recently launched new conversational Artificial Intelligence interfaces. With the ongoing demand for data centers and the upcoming 5G upgrades, Cisco has become an intriguing addition to our list of blue chip companies. It currently pays a 3.38% annual dividend yield.

9. Merck (NYSE:MRK):

Merck (MRK) is a pharmaceutical company operating worldwide, specializing in the production and distribution of prescription drugs, vaccines, biologic therapies, and products for animal health. The company's products are used to treat a wide range of medical conditions, including cancer, diabetes, cardiovascular disease, infectious diseases, and animal illnesses. Merck shifted its focus towards developing more advanced cancer-fighting medications and biotech products a few years ago, a decision that proved to be successful. Keytruda, one of the medicines developed by Merck, has gained popularity as a treatment option for various types of lung cancer with remarkable growth rates.

10. American Express (NYSE:AXP):

American Express (AXP) is a financial services company that offers a range of products and services to consumers, small businesses, and corporate customers. Amex's focus on the upper end of the credit spectrum makes it a noteworthy inclusion in the list of blue chip companies. By catering to this demographic, Amex mitigates the risk and uncertainties associated with lending, which could prove to be a major advantage as debt levels continue to rise, particularly in the US, and reducing default rates becomes more important in the medium term.

Conclusion

While blue chips stocks offer a wide range of investment opportunities for different assets, including long-term investments, dividend income, and growth prospects, investing in them requires careful research and analysis to make informed decisions. So, whether you are interested in Johnson & Johnson, Berkshire Hathaway, JPMorgan Chase & Co, Disney, or any other blue chip company, it's crucial to seek expert advice and do your due diligence before making any decisions.

FAQs

What are blue chip stocks?

Blue chip stocks are shares of large and well-established companies with a track record of stable financial performance, reliable earnings, and a solid reputation. These companies typically have a long history of paying dividends and are considered leaders in their respective industries.

What are the benefits of investing in blue chip stocks?

Investing in blue chip stocks offers many benefits, including stability, predictability, and steady growth potential. Blue chip companies are typically well-established, well-managed, and have a strong financial foundation, making them less risky than other investments. Additionally, blue chip stocks often pay dividends, which can provide investors with a steady stream of income.

What are some examples of blue chip stocks?

Some examples of blue chip stocks include Johnson & Johnson (JNJ), Berkshire Hathaway (BRK.A), JPMorgan Chase & Co. (JPM), The Walt Disney Co. (DIS), Cisco Systems Inc. (CSCO), Merck & Co. Inc. (MRK), and American Express Co. (AXP).

How do blue chip stocks perform during market downturns?

Blue chip stocks tend to be more stable during market downturns than other types of stocks because they are often leaders in their industries and have strong financial foundations. While blue chip stocks may still experience some volatility during market downturns, they tend to hold up better than other investments.

Are blue chip stocks suitable for all investors?

While blue chip stocks are generally considered less risky than other types of investments, they are not necessarily suitable for all investors. As with any investment, it is important to do your research, understand the risks involved, and consult with a financial advisor before making any investment decisions. Additionally, blue chip stocks may not offer the same level of potential returns as other types of investments, so investors seeking higher returns may need to look elsewhere.