If you're looking for safe, consistent income from established businesses, blue-chip stocks are the way to go. These big businesses have the firepower to withstand lots of adversity, making them particularly attractive in a recession, when investors are looking for safety. The best blue-chip companies provide safety and stability and are a critical anchor to any portfolio.

What makes a blue-chip stock?

While everyone's definition of which companies precisely fit in the blue-chip category differs, most agree that blue chip stocks:

  • Have big market capitalizations. To be a blue-chip stock, I personally think a company must have a market cap of at least $50 billion.
  • Are well-established companies with plenty of financial wherewithal. There are plenty of tech unicorns (Tesla, anyone?) that fit the market-cap definition above, but which don't really have the kind of income and stability that define a blue-chip stock. Since blue chips are well-established and stable, all should have the free cash flow to afford a dividend, and many are paying one.
  • Are market leaders and household names (or at least have brands that are). Everyone's heard of Johnson & Johnson (NYSE:JNJ) and General Electric. Not everyone knows Procter & Gamble and Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), but you probably do know P&G brands like Crest toothpaste and Dawn dish soap -- and Berkshire brands like Fruit of the Loom and GEICO.
  • Have exited their hypergrowth phase. Hey, stability and maturity come at a price -- and while the Alphabets of the world are certainly big enough and come with enough firepower to otherwise qualify as blue chips, they don't really seem like the type of stock most people think of as a blue chip.
Poker chips with "stock" written on them, stacked in increasing piles, with a red arrow pointing up and to the right

Get it? Blue chips? Image source: Getty Images.

The best blue-chip stocks on the market

In my opinion, the best blue-chip stocks combine everything I described above with two other attributes: significant untapped potential and great management. While every blue-chip company has exited its hypergrowth phase, that doesn't mean it has to have no growth (or even very little growth) left. That's why you won't see IBM, Coca-Cola, or Procter & Gamble on the list of best blue-chip stocks below -- I don't see any of these having the kind of growth necessary to sustain ever-larger dividend payouts.

There's also an issue of industry -- the list below doesn't include any carmaker or energy company. No matter how well Ford executes, the advent of electric cars and autonomous driving could be enormously disruptive to its business model. And ExxonMobil is incredibly levered to oil prices, so its future is a lot less clear to me than other blue chips.

If I'm going to invest in a company, I have to trust management. While Pfizer meets all the requirements to achieve blue-chip status, it will never get a dime from me (or appear on any "best of" list) because of its poor acquisition track record. A company with a management team that can't execute well on strategy isn't worth investing in.

With those factors in mind, here are what I consider to be the best blue-chip stocks:

Company Ticker Market Capitalization Free Cash Flow (TTM) Dividend Yield Cash Dividend Payout Ratio
Johnson & Johnson JNJ $371 billion $18 billion 2.4% 48%
Berkshire Hathaway BRK-A, BRK-B $447 billion $33 billion N/A N/A
Apple (NASDAQ:AAPL) AAPL $874 billion $51 billion 1.5% 25%

Data source: S&P Market Intelligence. TTM = trailing-12-month.

If you rolled your eyes after reading my picks, take heart from the fact that I did too after writing them. But isn't that the point of blue-chip stocks? They're supposed to be the inevitable long-term survivors. They're the obvious choices. And boy, these three sure are. In fact, I think they're such obvious winners that I own all three in my personal portfolio.

More than baby shampoo

Johnson & Johnson is a household name because of consumer products like Tylenol and baby shampoo -- but over 80% of its business is in lesser-known medical devices and pharmaceutical drugs. In a lot of ways, J&J actually functions as three companies: a sleepy consumer-goods supplier, a boring-but-steady medical-device producer, and a swiftly growing big pharma. J&J's dividend -- which it has increased for over 50 years -- is kept safe largely because of the consistent cash flow from its first two businesses, while the third keeps more growth-minded shareholders like me happy.

And with 15% year-over-year growth last quarter in pharma, I'm very happy. Oncology drug Imbruvica posted 47% year-over-year growth, to over $500 million in sales last quarter, and has achieved a market share of over 50% across its indications in the U.S. Blood-thinner Xarelto also posted 20% year-over-year growth, to $635 million in U.S. sales. And with a number of other drugs waiting in the wings for phase 3 data or approval by the U.S. Food and Drug Administration, J&J's drug franchise looks strong for years to come.

Bet on Buffett

Berkshire Hathaway is an insurance business that Warren Buffett has turned into a massive, profitable conglomerate.

Berkshire's insurance businesses collect premiums on their policies, most of which will one day be paid back to policyholders to cover the damages they're insured against. But Berkshire consistently aims to produce an underwriting profit -- meaning that not all of the money taken in from policies will ultimately be paid back to the insured. And in the meantime, that money -- the float -- can be invested for an additional profit.

Buffett invests that extra cash in acquiring businesses either in part (usually through the stock market) or entirely (by buying the companies). Berkshire has purchased all kinds of businesses over the years, including BNSF Railway, Clayton Homes, GEICO, and Fruit of the Loom.

Berkshire doesn't pay a dividend, and with good reason -- Buffett has always found better ways to use Berkshire's cash to grow the business. Need proof? Look at the 19% compounded annual gain in Berkshire's per-share book value from 1964 to 2016 -- good for an 884,319% increase overall.

Yeah, that beats some measly dividend any day of the week.

Perhaps the most controversial stock pick...

I'm sure I'll hear from a few people about placing Apple on this list. After all, it's still growing at a fast clip, with its fourth-quarter 2017 top line 12% higher year over year...but, frankly, so are Berkshire and J&J. Apple is also the largest publicly traded company in the world by market cap, at over $800 billion as of this writing. If that's not blue chip, I'm not sure what is.

Unlike the other two, Apple is highly levered to one product line -- that's the iPhone, in case you've been living under a rock for the past decade -- and that does theoretically increase the riskiness of the stock. Over half of Apple's $52.6 billion in revenue derives from smartphones. But management has done a great job of producing new products and carving out a profitable niche in the smartphone sector. And CEO Tim Cook is focused on growing Apple's services business (which includes iCloud, iTunes, AppleCare, and Apple Pay) to reduce the company's reliance on the newest iPhone model. Fortunately, that focus appears to be paying off: The services business grew by 34% year over year to $8.5 billion last quarter.

Apple has an impressive opportunity to continue growing its ecosystem across the shrinking PC market, tablets and smartphones, wearables, TV, and music -- yielding lots of additional potential.

Buy blue-chip companies for the future

The world is rapidly changing, and plenty of traditional blue chips will struggle to maintain their dominance as their businesses are disrupted and new entrants change how things are done. But Johnson & Johnson, Berkshire Hathaway, and Apple all operate in niches that could see them growing (and paying dividends) for many years to come. All three are positioned for long-term success, which makes them -- in my mind -- the best blue-chip stocks to buy.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Michael Douglass owns shares of GOOG, Apple, Berkshire Hathaway (B shares), and Johnson & Johnson. The Motley Fool owns shares of and recommends GOOGL, GOOG, Apple, Berkshire Hathaway (B shares), Ford, Johnson & Johnson, and Tesla. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.