Big-brand stocks, also known as blue chips, are likely to show up on most investors' wish lists at one time or another. These large-cap stocks with household names -- think Disney (NYSE:DIS) or McDonald's (NYSE:MCD) -- offer stability, solid cash flow, and, of course, brand recognition. Many of them can be found on the Dow Jones Industrial Average.
Let's take a few things every investor should know about big-brand stocks.
1. They tend to be less volatile than the broader market
With decades of history -- and often, generations -- behind them, big-brand stocks tend to be more stable than small-cap stocks, and are generally able to generate positive cash flow and even growth, even during recessions. For instance, from the beginning of 2008 to the market bottom -- the worst of the recession -- the S&P 500 lost 53.3%, but McDonald's fell just 10% as its stability and brand strength helped keep it on a relatively even keel.
Because of these stocks' reputations and long histories of success, investors are likely to flock to them for safety. Though not all are defensive plays, most tend to offer a cushion against downturns, and with concerns about a potential pullback in the market once the Federal Reserve moves more decisively and consistently to raise benchmark interest rates, big-brand stocks could be a good place to put your money.
2. They are highly liquid
Though most stocks tend to be liquid, or easy to sell, big-brand stocks are among the most liquid, as millions of shares of these companies change hands each day. For instance, more than 7 million shares of Disney are bought and sold on the average trading day, representing a value of about $700 million. Because these stocks are widely held by institutions and individuals alike, their bid-ask spreads -- the difference between what is being offered to buy a stock and what sellers are asking for their shares -- will be especially narrow, meaning there's little cost to the transaction.
3. They tend to pay dividends
While some big tech names like Alphabet and Amazon.com do not, almost all blue chip stocks make quarterly payouts to their investors, and have been doing so for a number of years. In fact, many are "dividend aristocrats" -- stocks that have raised their dividends annually for 25 years in a row or more. McDonald's, for example, has a 40-year streak of dividend hikes. Such companies have demonstrated the ability to return profits to investors despite recessions and other obstacles, and can continue to grow. For that reason, dividend aristocrat status is prized in the market. Beyond that, dividend stocks on average tend to outperform non-dividend stocks -- yet another to reason choose big-brand dividend payers.
4. They're great for beginning investors
Plenty of investors padded their retirement accounts during Apple's (NASDAQ:AAPL) rise in the decade from 2003 to 2013. The iPhone-maker went from a forgotten tech company to the most valuable enterprise in the world thanks to the success of its now-trademark product.
But what also made Apple an appealing investment was how readily accessible the company was to even novice investors. Nearly everyone is familiar with the brand, and its business model and financial reports are straightforward. While that doesn't necessarily make a stock a winner, it does make it easier for investors to make informed decisions about the stocks. Big-brand stocks are also well-covered so investors can easily find analysis and commentary without having to examine the companies' own financial reports.
Big-brand stocks, companies average Americans are readily familiar with, are generally easier to understand because you already have some knowledge and understanding of its business. By contrast, some investors prefer looking at esoteric stocks in biotech, emerging markets, or niche technologies, but those can be much more difficult to for investors with limited knowledge of those sectors to parse. As Apple's rise -- and that of other big brands like Amazon or Netflix -- shows, there are plenty of winners hiding in plain sight.