About Blue Chip Stocks

This article covers a brief history as well as features and benefits of blue chip stocks. It also discusses points to consider when deciding whether or not to invest in blue chip stocks, as well as common misconceptions.

History

The term "blue chip stock" was coined by the Dow Jones' Oliver Dingold in the early 1920's (source: Wikipedia). The phrase refers to a blue poker chip, which is the highest and most valuable piece. A blue chip stock is classified as the stock of a large company that is an industry leader and provides consistent, steady investment returns. Blue chip stocks are traditionally thought to be a safe investment since the prices do not tend to vary wildly.
To compensate for slower growth, blue chip stocks pay investors dividends at regular intervals. Often, the amount paid out in dividends increases over time.

Considerations

To decide whether blue chip stocks are a wise investment, you must take into account a number of factors. A person's age, number of years until retirement, amount of desired risk and complete investment portfolio must be considered.
Even though blue chip stocks are relatively safe stock investments, keep in mind that a balanced, well-rounded portfolio should always include mutual funds and bonds as well.

Features

The features that identify a blue chip stock include the size of the company, the price of the stock, the quality of the stock and the predicted annual returns.
Only very large, industry leading companies' stock is referred to as blue chip stock. Due to the steady, reliable nature of these companies and their proven success in the industry, the stock price of blue chip stock is usually much higher than the average stock price. For example, just one share of Berkshire Hathaway stock can cost over $100,000.
Annual returns for blue chip stocks are generally very predictable since companies pay dividends at regular intervals. Though the dividends can go up or down depending on company performance, blue chip stock investors count on the dividends as part of a return.

Benefits

Since blue chip companies are industry leaders, the company is likely to have a long standing record of successful business. Most industry leaders have low debts and healthy balance sheets, which leads to consistent and increased dividends for shareholders.
Unlike more volatile stocks, blue chip stocks are likely to ride out dips in the economy without dropping substantially. For example, a recession would likely have a stronger negative impact on other stocks than it would the blue chip companies (although it is worth noting that in a recession, nearly all stock prices will dip at least somewhat).

Misconceptions

Inexperienced investors can make the mistake of thinking blue chip stocks are a safe, sure bet with guaranteed dividends. However, this is not always the case. The state of the economy, industry news, and company mergers & acquisitions can all cause the price of a stock to fall, irregardless of how well established the company behind it is.
Also, investors must make sure to diversify their portfolios. Even holding multiple blue chip stocks is not enough of a diversification; safer investments like Treasury bonds and established, steady yield mutual funds should be included to mitigate risk. However, mutual funds do exist that invest primarily in blue chip stocks; these are a good starting point of investment for the inexperienced or conservative investor.