A Blue Chip company is a company with a national or international reputation. They are generally large well-established companies that have been operating for many years and whose earnings and overall finances are stable. Think of companies such as Johnson & Johnson, Microsoft, or Disney.
Best Blue Chip Stocks – The Shortlist
Apple (NASDAQ:AAPL)
Apple is an enormous tech company that all investors are certain to be familiar with. Its iPhone is the most widely used phone worldwide, while it also produces Mac computers, iPads and Apple Watch devices.
The company also has other offerings such as Apple Music, Apple TV, iTunes and its App Store, which provide it with recurring revenue streams. Apple has a strong base of loyal consumers who jump at the chance to purchase new products when they are released.
Apple has a market cap that hit the $1tn mark in 2018, soared over $2tn in 2020, and now sits well above $3tn. The growth is almost taken as a given at this moment in time, but every company will have its challenges.
American Express (NYSE:AXP)
American Express is a financial giant in the Blue Chip arena. It has been around in excess of 170 years, but it continues to reinvent itself and attract young consumers into its fold.
It is well known as a credit card company, but it also owns and maintains its own proprietary payment network. AXP, along with its direct competitors, Visa and Mastercard, tend to pull back when the global economy weakens, but they are also harbingers of when the good times are just around the corner.
The forecast for AXP is for revenues to grow at a double-digit pace going forward, and dividends have already been raised during the current year.
Johnson & Johnson (NYSE: JNJ)
The majority of the company’s revenue comes from prescription drugs and medical devices.
Johnson & Johnson previously had a variety of consumer products under its banner, including Neutrogena, Band-Aid, Johnson’s Baby Powder and Tylenol. That was until the spin off of Kenvue in 2023 created two separate businesses. The healthcare giant had announced plans to divide into two separate companies in November 2021, and did indeed split apart the consumer products component from the pharmaceutical and medical devices division. This took place via an IPO in May 2023.
JNJ remains a powerhouse, with a market cap above $370 million, and one of two US based companies with a credit rating of AAA but it has not been plain sailing for the company. A dividend yield above 3% continues to satisfy income seeking investors, but growth has been harder to find in recent times.
Coca Cola (NYSE: KO)
Probably the most recognisable brand in the world, the beverage company engages in manufacturing, marketing, and the sale of non-alcoholic drinks. Some of its brands include Coca-Cola, Diet Coke, Fanta, Sprite, Powerade and Schweppes.
The company is a leader in its industry and has navigated through market changes over the years without hassle. It has proven over the past century that it can adapt to consumer tastes and market changes by expanding its global array of consumable products into every market across the planet.
Coca-Cola has been paying a dividend since the 1960s, a streak extremely admired by the investment community. Its current dividend yield is above 3%, making it worthy of its place on the list.
Microsoft (NASDAQ: MSFT)
Microsoft is another household name and remains one of the leading distributors and providers of IT services in the world of high tech. The market has treated this stock harshly during the pandemic, but it has continued to perform, the target of many investors and hedge funds.
The company just continues to grow, and with earnings on both EPS and the revenue side consecutively beating Street estimates, MSFT is an obvious inclusion to the list. One of very few firms with a market cap above $3trillion, Microsoft is a true blue chip.
The firm also recently raised dividends, marking 22 years of consecutive growth in its dividend payouts. Long gone are the early years of MSFT when no dividends were paid. Its dividend yield sits below 1%, but this is a blue chip that combines income with growth.
The Blue Chip Index
Although there is no defined index for only Blue Chip stocks, the Dow Jones Industrial Average (DJIA) is often used to measure the health of very large and well-known public stock companies. The index consists of only 30 participants, and it is one of the oldest equity indexes followed by the investment community. Each company in it is large, but weightings follow a percentage allotment formula.
It is not a gauge of the entire economy, but it does reflect on how Blue Chips are performing. Here is a recent chart depicting the history of the Dow over the past two years on a weekly basis:
Other indices such as the S&P 500, and the Nasdaq 100 will have many blue chip names inside, but being a blue chip does not in and of itself make a company into an investment you want to make. Certain big brands, and big companies have fallen out of favour in a cyclical nature over time, so any list of blue chips remains as dynamic as the stock markets themselves.
Macro events, and monetary policy can have big impacts on the rotation of funds within the markets, so make sure that whichever sector you consider investing into is one that you are willing to periodically check up on.
Are Blue-Chips Safe?
Safety can mean different things to different investors. As Blue Chip companies are typically large, household names, the idea that you could lose heavily when investing in one is not a notion that many people share. These stocks however are not immune to economic swings or specific downturns within an industry type.
Blue chips performed poorly during the early period of COVID, and wider economic shocks can hit all markets and sectors given the right conditions. Regardless, most investors regard blue chip stocks as belonging to a special club of the best, and representing the safest path to investment success. Are Blue Chips the safest stocks around? Safety at times is in the eye of the beholder, depending upon what relative criteria are being used.
No Blue Chip companies are completely immune to financial difficulties. The last major financial crisis in 2008 demonstrated that some Blue Chip businesses can go bankrupt – such as General Motors and Lehman Brothers, each considered historical powerhouses of value and safe-haven investments. The simple lesson is that all investments contain a degree of risk.
The good thing about a Blue Chip is that it will more than likely bounce back when a recovery begins to take place, and be well positioned to ride out almost all but the worst of downturns. In bad times, a large market cap in excess of $100bn and a strong balance sheet will act as buffers when turmoil in the market becomes a reality. These companies also benefit from large liquidity pools, thereby preventing too much of a bad reaction. Dips are often thought of as good time to invest in these shares.
Why Invest In Blue-Chips?
Blue Chip companies are seen as stable and are generally viewed as safe assets to invest in. They tend to have a good cash flow, and if we see a market crash, they are usually among the companies to make a healthy recovery.
The average rate of return for Blue Chip stocks is around 10%, meaning that they are smart investments, regardless of whether you are an experienced or inexperienced investor. Knowing that the company has been able to navigate through challenging periods and still come out as one of the leading players within its industry is reassuring. They also typically pay a consistent dividend.
Know This Before Investing In The Sector
Even if the company you may be considering investing in is a blue chip, you still need to do your research and understand what it does so that you can make an informed investment decision.
Also, remember that while Blue Chip companies are considered safer investments, it does not mean that they won’t experience negative periods. However, if they or the market overall see a downturn, the Blue Chip company is likely to bounce back if you take a long enough time horizon.
Investing in Blue Chip stocks is a great place to start out in financial markets, as you can be confident in the relative stability of the company, while hopefully profiting from things such as dividend payments over time. Before you begin, make sure that you understand the risks involved in any investments and try to properly manage those risks where possible.
