Blue Chips

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Blue chip stocks are widely considered to be some of the safest and most dependable stocks to invest in due to their size, stability, and ability to absorb bad market conditions. However, many investors don't know exactly what a blue chip stock is. Let's take a look at what makes a stock a blue chip, which stocks qualify, and how to safely incorporate blue chip stocks into your long-term investing strategy.

Characteristics of a blue chip stock
There is no formal cutoff that determines which stocks are blue chips and which ones aren't. Generally, the 30 stocks on the Dow Jones Industrial Average are considered blue chips, as are several other companies that meet certain criteria.

Most blue chips (but not all) have the following characteristics in common:

  • They are big companies with reputations of performing well in good times and bad. For example, Wal-Mart and IBM handily beat the overall market's performance during the 2008-2009 crash.

WMT Chart

  • They have a strong history of dependable earnings growth, and are profitable in any type of economic environment.
  • They typically have a market cap in the billions and are among the largest two or three companies in their business.
  • Usually, blue chips are household names -- it's rare to consider a stock to be a blue chip if most Americans are unfamiliar with the company's business.
  • Most blue chips pay dividends, and have a long, consistent history of dividend increases

Some common examples
As I mentioned before, there is no formal list of companies that qualify as blue chip stocks, but there are some stocks that are universally regarded as blue chips. Here are a few popular ones to help illustrate our definition of the term:

Sector

Examples

Technology/Telecom

AT&T, Microsoft, IBM, Verizon

Consumer Goods

Wal-Mart, Procter & Gamble, Coca-Cola, Home Depot

Financials

Goldman Sachs, Wells Fargo, JPMorgan Chase

Energy

ExxonMobil, Chevron

Industrials

Boeing, General Electric, 3M, Caterpillar

Healthcare

Merck, Johnson & Johnson

Again, this is not an exhaustive list, and determining which stocks are blue chips is somewhat a matter of opinion. For example, Apple's business looks pretty bulletproof right now and is definitely among the most recognizable tech companies -- and it's a part of the Dow, but it just recently started paying dividends and its history of performance during crashes and volatility isn't exactly great. So, the answer to whether Apple is a blue chip stock depends on whom you ask.

Safer but not perfect
Finally, I want to emphasize the point that even though blue chips tend to handle crashes, corrections, and recessions better than other stocks, that doesn't make them completely immune. Crashes in specific sectors have the potential to wipe out even the strongest companies, as Lehman Brothers' shareholders found out the hard way during the financial crisis.

So, although owning a portfolio of high-quality blue chip stocks is a smart move, it's still important to properly diversify and to do your homework before buying any particular company. However, a well-rounded portfolio of blue chips can provide you with the growth potential you want along with the peace of mind that comes with knowing you are well insulated from market corrections.

Matthew Frankel owns shares of AT&T and Caterpillar. The Motley Fool owns and recommends Apple and Wells Fargo. It owns shares of ExxonMobil, General Electric Company, and Microsoft and has the following options on Coca-Cola: long January 2016 $37 calls, short January 2016 $43 calls, and short January 2016 $37 puts. The Motley Fool recommends Chevron, Coca-Cola, Home Depot, Johnson & Johnson, Procter & Gamble, and Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.