There are many great companies out there, but not all great companies are created equal. There's great, and then there's blue chip. There's no universal criteria to be labeled a blue chip stock, but in general, blue chip stocks are large, well-established companies that are leaders in their industries and have large bank accounts. Even by the highest standards, blue chip stocks have managed to set themselves apart.
Think about companies such as Apple, Coca-Cola, and Walmart, for instance. More than 1 billion people in the world use an iPhone, Coca-Cola's classic soda is easily the most recognizable beverage worldwide, and you can't venture into most cities in the U.S. without seeing a Walmart store.
If you're an investor, your portfolio should include blue chip stocks. Here's why.
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The title is well earned
Blue chip companies earn that title by proving to be solid businesses that can consistently lead their industries and make a lot of money while doing it. If you're an investor, that checks off two of the most important boxes you could ask for before making an investing decision. With the uncertainty that comes with investing in the stock market, having the reliability of a blue chip stock can be comforting.
By no means does this mean blue chip stocks are risk-free or foolproof, though; just look at General Motors' 2009 bankruptcy. But due to their size and resources, you can be confident the overwhelming majority of blue chip stocks will find a way to weather short-term economic storms. It may not be today, next month, or even next year, but at some point, great businesses find their way to brighter days.
If you're risk-averse, look no further than blue chip stock exchange-traded funds (ETFs). You'll get exposure to blue chip companies, but your risk will be spread among many companies instead of being too reliant on the success (or lack thereof) of a few companies.
It pays to hold them
Dividends have nothing to do with labeling a company as a blue chip stock, but many of them do pay dividends, and some have stable dividends that increase yearly. It's much easier to ignore short-term price fluctuations when you know you're getting paid your quarterly dividend regardless.
Investing and building a sizable stake in blue chip stocks over time can make your dividend payouts good supplemental income in retirement. At a 2.5% average dividend yield, every $100,000 in value would pay out $2,500 annually.
You should still diversify
Part of having a well-diversified stock portfolio is having companies of different sizes. After all, it's nice to be investing in household names, but those same companies were once much, much smaller -- and there's a lot of money to be made in that growth. Amazon was far from a blue chip stock in January 2000, yet every $1,000 invested in the company then would be worth over $40,000 today. Investors who might've ignored Amazon because they only focused on blue chip stocks likely missed the boat on one of the biggest wealth creators this generation has ever seen in the stock market.
Now, should you expect to find the next Amazon like a diamond in the rough? Absolutely not. It'd be nice, for sure, but you shouldn't expect it. Ideally, blue chip stocks are a staple in your portfolio, but not all of it. You want to give yourself a chance for the high growth potential that comes with smaller companies.
