What are Blue Chip Stocks?

If you’ve ever played poker you know that the blue chips have the highest value. It is for this reason that stocks are considered blue chip stocks when they are considered to have the most value. But exactly what are blue chip stocks?

Generally speaking, blue chip companies are amongst the most stable of companies. They have proven themselves over a period of time to have reliable growth and are financially stable. They are well-established rather than start-up companies and have shown themselves to do well even when the economy is not stable.  They are considered to be a safer investment than other stocks and as such are popular for investors with low risk thresholds such as retirees. Many blue chip companies pay a dividend which makes them popular with the investor that requires a regular income from their investments. You will often see a number of blue chip stocks in any managed fund, such as retirement accounts and non-profit foundations.

Some of the characteristics of a blue chip stock include:

  • Consistent dividends over an extended period of time
  • Regular increases in dividend amount
  • Stable income figures showing a long history of stability
  • Having a good portion of the market share in their industry
  • Strong balance sheet
  • Limited debts
  • High credit rating
  • Competitive advantage in their industry, such as filling a niche, being especially cost efficient or having specialized distribution
  • Being well diversified

An investor that prefers the advantages of blue chip stocks can either select various ones for their portfolio or seek out what is referred to as a blue chip basket. This works like a mutual fund in that when you invest in one you are not getting one stock but portions of a number of various blue chip stocks. This allows for a greater diversification than buying just one or two different individual blue chip stocks which is another safeguard practice that is highly recommended.

A form of basket investing is a HOLDR that enables the investor to obtain shares from a specific industry or sector. There are a variety of these offered, including:

  • Biotech
  • Internet
  • Pharmaceutical
  • Retail
  • Software
  • Wireless
  • Utilities
  • Broadband
  • Oil Services
  • Telecom
  • Semiconductor
  • B2B Internet
  • Regional Bank

Whether one chooses a fund or buys a blue chip stock individually, these are quite popular during economic downturns as a more safe investment. And since blue chip stocks like IBM, Wal-Mart, and Coca Cola are currently at lower prices, some investors are grabbing them in the hopes of a nice profit in the future.