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Blue Chip Stocks

Moneyzine Editor
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Moneyzine Editor
4 mins
January 8th, 2024
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Blue Chip Stocks

When investors talk about quality stocks, they'll often use the phrase "blue chip." Unfortunately, even seasoned market analysts can't agree on a definition of this term. But they do agree that blue chip stocks have some very desirable attributes.

Defining Blue Chip Stocks

So what exactly are these high-quality stocks? The term "blue chip" itself is a reference to placing a wager. At one time, blue was the color of the highest-valued wagering chip, so the term is actually referring to stocks that are considered "safe bets."

History tells us a blue chip stock is one that is very likely to provide a fair return on investment. In order to do so, a stock must have a proven track record, be financially sound, and must be somewhat insulated from the cycles of the economy. Terms that are often used in conjunction with blue chip include "bellwether" and even "large cap." Bellwether is used to describe a company that is recognized as the leader in its industry. For example, Microsoft would be considered a bellwether stock for computer software. Large cap is a reference to the size of a company in terms of total market capitalization. Market capitalization is calculated by taking the number of shares outstanding and multiplying by the stock's current price per share. It's the value of all the company's shares of common stock owned by investors.

Dow Jones Industrials

Perhaps the most famous list of 30 blue chip stocks is the Dow Jones Industrial Average. First published in 1826, the 30 companies in the DJIA are carefully selected from a variety of industries to provide a good indication of the American economy's health. While the performance of any individual member of the DJIA will fluctuate over time, most investors would agree the Dow is a good benchmark for identifying blue chip stocks.

Finding Blue Chip Stocks

We're going to use a stock screener to develop a quick list of what would be considered blue chip stocks. Before doing so, it's important to have a quantifiable definition. That means we need to translate the characteristics described above into parameters to be entered into the screening tool.

At one time, blue was the colour of the highest-valued wagering chip, so the term blue chip refers to stocks that are considered "safe bets"
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  • Proven Companies: Part of our definition includes companies with a proven track record. We'll use membership in the S&P 500 as a proxy for this requirement.

  • Large in Terms of Resources: To make sure our list only contains large companies, we're going to set our blue chip stock's minimum market capitalization at $10 billion.

  • Financially Sound: Characteristics of these companies include profitability, paying of dividends, and having good bond ratings on their debt. We're going to screen the universe of stocks for high dividend yields, earnings growth, and current ratio.

During this exercise, we used the following criteria to develop the list of ten blue chip stocks appearing in the table below:

  • Membership in the S&P 500

  • Market Capitalization in excess of $50 billion

  • Dividend Yield > 1.9% over the last five years

  • Expected EPS growth > 3% per year over the next five years

  • Current Ratio greater than or equal to 1.8

Blue Chip Stock List

Symbol

Company Name

CSCO

Cisco Systems Inc

DWDP

Dowdupont Inc.

AMGN

Amgen Inc

MCD

McDonalds Corp

MDT

Medtronic

MMM

3M

AVGO

Broadcom Inc.

TXN

Texas Instruments

QCOM

Qualcomm Inc.

GILD

Gilead Sciences Inc.

Of the ten stocks found using the stock screener, and based on our definition of a blue chip stock:

  • Cisco, McDonalds, DowDuPont, and 3M are current members of the Dow Jones Industrial Average.

This is a surprisingly good outcome; given the fact the stock screen was based on several relatively simple search criteria.

Buying Blue Chip Stocks

Investors looking to purchase blue chip stocks have several options. Perhaps the easiest way is to purchase a mutual fund based on the Dow Jones Industrial Index, or the Dogs of the Dow. A second option is to purchase an exchange traded fund such as the Dow Diamonds. Finally, those investors interested in buying stocks of individual companies might want to read through our series on Stock Research. In those articles is found a step-by-step method to help identify not only blue chip stocks, but also stocks that might be undervalued.

Additional Resources

  • Diversifying Your Portfolio
    With stock ownership, it's certainly possible to have too much of a good thing. Diversity of stock holdings is important, just ask any former employee of Enron. When that company filed for bankruptcy, thousands of employees lost nearly all their savings. In this article, we're going to explain why experts feel investors should avoid putting more than 10% of their portfolio's assets into one company's stock. We'll also explain how to go about diversifying a portfolio, as well as providing an example to demonstrate the positive impact holding an assortment of stocks can have on your return on investment.
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  • Buying Defensive Stocks
    During economic recessions, or market downturns, investors typically add defensive stocks to their portfolios. These stocks can be expected to perform relatively well during all phases of a business cycle, even during difficult economic conditions. In this article, we're going to help define what is meant by a defensive stock. As part of that definition, we're going to explain how to identify these companies. We're also going to talk about the pros and cons of investing in these stocks, including the best time to buy them.
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  • Buying Cyclical Stocks
    There is no doubt the stock market presents individuals with a variety of investment opportunities every trading day. One of the opportunities investor should be familiar with is cyclical stocks. As consumers, we are at the mercy of large economic swings or cycles. As investors, we realize these same economic cycles provide us with a chance to grow our investment returns or protect ourselves; if we know what signals to look for.
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  • Buying Preferred Stock
    When investors talk about buying stocks, they're typically referring to shares of common stock. But preferred stock offers the investor the advantages of both common stock and bonds, and is oftentimes a compromise worth pursuing. In terms of financing, preferred stock usually occupies a relatively small percentage of the overall mix of a company's capitalization; typically accounting for less than 10% of a company's overall source of funds. That's because from a tax standpoint, preferred stock is treated as equity, but the requirements for dividends are more like bond payments.
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  • Value vs Growth Stocks
    Investors are constantly faced with the decision between risk and return. The same logic applies to growth versus value stocks. Rationale investors will agree that picking a quality stock is important, but not everyone agrees that value is more important than growth.
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  • Dividend Paying Stocks
    When interest rates are low, retirees and other investors turn to dividend paying stocks to provide them with a reliable source of income. In fact, investing in companies paying high dividend yields is often viewed as the "sensible" or "rainy day" approach to creating an investment portfolio.
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  • Finding the Best Stocks to Buy
    As investors, it's important to know how to go about finding the best stocks to buy. Before it's possible to successfully choose these stocks; however, it's essential to understand some of the fundamentals of evaluating securities.
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