What Makes Blue Chip Stocks So Enticing for Traders?

Why Are Blue Chip Stocks So Desirable?

Believe it or not, the term ‘Blue Chip Stocks’ is a borrowing from the game of poker. In this strategy-based card game, Blue Chips are the most valuable chips in your stack. While the jury is out on precisely what constitutes a blue-chip stock, it’s generally accepted that these are the stocks of companies with an established track record of stable earnings over many years.

Blue chip stocks are relatively expensive, but they are highly bankable investments since they generate steady growth. If you are thinking about investing over the long-term, blue chip stocks are definitely an option worth considering.  For the most part, blue-chip stocks tend to deliver with a series of long-term uninterrupted dividends to stockholders.

As far as blue chip stocks go, they are listed on the DJIA (Dow Jones Industrial Average), and the SPX (S&P 500 Index). The financial reports of blue chip stocks tend to present favorably, with strong earnings, and an ironclad income statement and balance sheet. The market capitalizations of these companies are substantial, and they are dominant players in their sector, or industry. Blue chip stocks are highly desirable for the products and services they produce, and they have high brand recognition value.

Notable Characteristics of Blue Chip Stocks

  • Blue chip stocks are AAA rated
  • They are strong and stable investments
  • Blue chip companies routinely repurchase stock when the price is right
  • Over the long-term blue chip companies tend to deliver consistent returns
  • Blue chip stocks present lucrative passive income opportunities for traders
  • These stocks are characterized by low volatility and more predictable earnings
  • These blue chip companies are much larger than the average-sized corporation

During economic downturns, Blue Chip stocks tend to hold their value much better than traditional investments. Many blue chip companies are listed on the tech-heavy NASDAQ which features a high degree of volatility.  It is entirely possible for blue chip stocks to fail, but this is the exception rather than the rule.

Wall Street’s most desired companies – the blue-chip stocks – have a market cap of at least $5 billion, with many years of consistently stable earnings. As an investor, you are likely drawn to these stocks by dint of their sheer size and integration into society. The likes of Amazon, Facebook, Apple, Tesla, Coca-Cola Company, Google, 3M, American Express, Cosco, Disney, IBM, Johnson & Johnson, McDonald’s, Microsoft, Nikkei, Walmart, Visa, Verizon, Starbucks, Bank of America, and many others are considered blue-chip stocks today.

What’s the Difference Between Blue-Chip Funds & Blue-Chip Stocks?

It can be incredibly difficult to manually start selecting companies to invest in. That’s where ETFs (exchange traded funds) and index funds come into the equation. Each of them curates a substantial component of leading companies and incorporates them into the ETF and index fund respectively. That way, new investors can simply click to trade that particular ETF in one transaction.

Since both of these funds track the performance of an index, it is best to select the large-cap companies listed on the SPX (S&P 500), and the DJIA (Dow Jones Industrial Average). These options, particularly the ETF provide safety in numbers; a large group of top-performing blue-chip stocks is included in these funds.

Investing in top-performing companies also has additional benefits. Dividend payments can be substantial with the right stock. Consider the likes of AT&T, Dominion energy, Bank of Nova Scotia, Chevron, and Verizon Communications. Many people assume that all blue-chip stocks are cut from the same cloth, with high dividends. Yet, there is debate about whether the major tech stocks such as Apple (AAPL), Amazon (AMZN), and Facebook (FB) are considered blue-chip stocks. For all intents and purposes, they are.

Blue-Chip Stock Allocations and Current Market Conditions

The leading tech stocks deliver outsized returns and consistently stable earnings with regular dividend payouts. According to research and analysis, the average rate of return on blue chip stocks is 8% – 12%. It’s not quite the 20% + club, but it’s certainly far enough away from zero to warrant consideration. Investments in blue-chip stocks are easy enough to undertake. Trading platforms like Fidelity, E*TRADE, Charles Schwab, Robinhood, and the like are popular options for buying blue-chip stocks.

There isn’t really a set percentage when it comes to portfolio management and blue-chip stocks. However, if you are going to purchase individual stocks, you should allocate no more than 2% – 3% of your available budget to any individual stock. That way, if the stock fails, it doesn’t take your entire portfolio down with it. Since it is time-consuming to individually select stocks for inclusion in a portfolio, traders tend to opt for broad-based index funds and ETF’s to simplify the investment process.

Many blue-chip stock companies increase their dividend payouts annually. This is helped by a rising stock price, and a bullish stock market. The US markets have enjoyed an unprecedented run of form for quite some time, and thanks to the recent $1.9 trillion stimulus approved by Congress, the Senate, and signed into law by President Biden, the markets will be flush with cash and further bullish sentiment will ensue.