The objective of most investors is to find and invest in stable companies that consistently release positive results. In part, investors often look to invest in blue chip stocks. But just how do you define blue chip stocks and why do investors tend to favor them for inclusion in their investment portfolios?
A Definition of Blue Chip Stocks
Blue chip stocks are those of well-established large cap companies that are in good financial shape, are industry leaders and have
comparatively low debt to equity ratios. Blue chip stocks are also generally regarded as high quality stocks that consistently pay dividends in good and bad times.
While blue chip stocks usually report positive numbers, they are generally so large that they tend to report modest growth numbers, and for that reason they are not usually regarded as growth stocks.
Investing in Blue Chips Stocks
While no investment is sure, blue chip stocks are generally better able to weather an economic downturn and in some cases may even be able to continue paying dividends and report positive numbers to shareholders. These A grade equities usually enjoy
investor confidence because of their track record and blue chip title. Therefore they may experience an appreciation in stock price while other shares are losing value.
However, because many blue chips are widely held and often make up stock market indices, the market may trade them according to market sentiments rather than on the state of the company’s financials or competitive environment. Regardless, they generally fare better than stocks with less prestige.
While blue chip stocks have their positives, but there are some characteristics that make them unattractive to some investors. Actually, the very thing that makes blue chips attractive may in the long-term make them unattractive. For example, because many investors flock to blue chips their dividend yields tend to be very low, even while the dividend payments may be consistent. For this reason, investors tend to look elsewhere for growth opportunities.
Blue Chip Investment Strategy
A challenge that many investors have is finding fairly valued blue chip stocks. Because these equities are very popular and tend to be the first choice of many investors, their prices are often fairly supported by strong market demand. However, prices sometimes fall on rumors or disappointing news, which can present an investor with a good opportunity to buy on a dip, assuming that the downward move is not sustained.
Examples of Blue Chip Stocks
The following are some examples of blue chip stocks:
- Home Depot
- American Express
Blue chip stocks are generally defined as well-established companies with a proven track record, offering consistently positive results and dividend payments. While their stability is attractive to many investors, it can be difficult to find a blue chip stock at a good value. Nevertheless, they are investment options that are well favored by many stock market traders and equity investors.
“A Definition of Blue Chip Stocks.” David Prior