"Blue-chip stocks" is a term used for regular shares of big companies that have a history of doing well. While these stocks can be a bit pricier, they are well-liked for being stable and showing consistent, gradual growth.
Their dependable growth makes them a smart option if you're thinking of investing for the long run. Find out more about why you might consider adding these stocks to your investment collection.
The term "blue-chip stock" originates from poker, where the most valuable chips are blue. Defining a blue-chip stock can vary, but generally, these stocks belong to companies with a long history of stable earnings and consistent dividend payments to stockholders.
These stocks are part of the S&P 500 index, and many of the top ones are in the Dow Jones Industrial Average. Blue-chip companies have strong financial statements and are among the largest in the world. They often have a competitive edge, like cost advantages from their size, a strong brand, or ownership of crucial assets.
These companies typically buy back their own stock when the price is favorable. They also issue high-quality bonds, with the best ones getting a triple-A rating.
Investors are drawn to blue-chip stocks because they offer consistent returns. While they may face challenges during economic downturns, these companies generally remain profitable over time.
Blue-chip stocks are known for their stability and lack of volatility. Unlike newer companies that may experience unpredictable swings in value, blue-chip stocks tend to change in value more gradually, reducing the stress associated with buying and selling decisions.
Investors also appreciate blue-chip stocks for their strong financial standing, ensuring the reliability of passive income from dividends. The likelihood of these top companies cutting dividends is minimal, especially when portfolios are well-diversified. If such reputable companies were to face widespread dividend cuts, it would signal more significant concerns beyond the stock market for investors to worry about.
You might recognize several well-known blue-chip stocks, such as:
Sometimes, a company that used to be a top-performing blue-chip stock can go bankrupt, like Eastman Kodak did in 2012. However, even in such cases, long-term investors might still profit from dividends, spin-offs, and tax credits.
Except for extreme events like catastrophic wars or unforeseen incidents, there has never been a period in history where consistently investing in blue-chip stocks would lead to financial ruin. Of course, this assumes proper diversification, a long-term holding strategy, and buying at reasonable prices. While there have been challenging times such as 1929-1933, 1973-1974, and 2008-2009, during which investors saw significant declines in market value, enduring these downturns is part of the deal. It's crucial to understand that blue-chip stocks are typically part of a buy-and-hold approach with a focus on the long term. They can play a vital role in a well-rounded investment portfolio that includes lower-risk assets like bonds.
