A blue chip stock is a stock in a company that is financially stable, pays a historically stable dividend, and is well established in its field. Investors perceive an investment in a blue chip stock to be a safer than an investment in other stocks. The term blue chip originates from the game of poker, where the chips with the highest monetary value are blue in color.
Identifying Blue Chip Stocks
If you want to add blue chip stocks to your investment portfolio, consider the stocks that are included in the Dow Jones Industrial Average (DJIA). The Dow is a widely reported market average, and is a collection of thirty industry-leading companies. Many of these companies are household names, such as Wal-Mart, General Electric, Microsoft, and McDonald’s. The thirty stocks in the DJIA are carefully selected by the editors of the Wall Street Journal, and in general, they all have stable earnings, excellent credit ratings, and large customer bases. Choosing one or more of the stocks in the DJIA is an easy way to invest in blue chip stocks.
Advantages of Owning Blue Chip Stocks
The main advantage of owning a blue chip stock is that it’s the closest thing to a sure thing in the stock market. Blue chip stocks usually provide a return, even if it’s just a small uptick in the price when the rest of the stock market is even or down. Many blue chip stocks have a long history of paying dividends, and many of these companies raise their dividend rates regularly.
Disadvantages of Blue Chip Stocks
There are a few disadvantages to blue chip stocks. Their stock prices are more expensive, making it more difficult to build a diversified portfolio. Blue chips will not make you rich quickly; their stock prices do not make large moves in a short period. Even though they are by definition very stable companies, blue chip stocks are not necessarily buy-and-hold forever stocks. Check their performance periodically to ensure that you don’t end up with a used-to-be blue chip stock like General Motors in your portfolio.
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