What are blue chip stocks?

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What are blue chip stocks?

The phrase itself comes from the game of poker, where the blue chips are worth the most money. In simple terms, blue chip stocks are the best of the best. There’s no specific qualifications for a blue chip stock, but generally speaking, they’re major companies that have had a solid financial track record spanning many years. These kinds of companies tend to be safer and less volatile than other stocks and often pay a dividend. When you think of a specific industry, the blue chips are frequently the brands that dominate their market.

During a stock market crash, a recession or market volatility, you’ll often hear analysts suggest buying blue chip stocks. The reasoning here is that major companies are more likely to weather a storm, thus their impacted stock prices are expected to rise after a crisis.

Some of the typical characteristics of a blue chip company include:

• Large company. Also known as large-cap stocks, meaning they have a market capitalisation worth billions of dollars.
• Solid financial track record. Revenues and profits are consistent and proven, giving shareholders performance they can count on.
• Established company. Usually lead in market share for their products or services, are available everywhere and benefit from widespread brand recognition.
• Pays dividends. Their dominance in the market means that profits are better utilised when shared with investors than they would be if spent on advertising, expansion or for other business purposes.

What are Ireland’s blue chip stocks?

There’s no official list of blue chip stocks – the closest we have is the list of companies on Euronext (formally the Irish Stock Exchange), a list of Ireland’s top 60 companies by market capitalisation. It includes companies with a history of providing steady returns and minimal volatility to investors, and they’re spread across a range of market sectors, including:

Banking and financial services

Companies in the financial sector make up a portion of the blue chip classification. These companies tend to have a history of providing large dividends and include the major banks and credit card companies, including:

Oil, gas and mining

As drilling and mining is a cyclical industry, natural resource companies have the potential to provide high capital growth. But can have a reputation for underperforming when the mining industry experiences a downturn. Having said that, companies that have diversified businesses firmly established across the nation include:

Retail and restaurants

Retailers tend to offer medium-sized dividends to shareholders, and are popular choices among investors. Also, popular restaurant chains have loyal followings that provide consistent profits. Blue chip stocks in this sector include:

Why are blue chip stocks popular?

Many successful long-term investors have advocated for investing in companies that you believe will be around for a generation or two. The kind of stocks that fit that description are the blue chips that continue to grow and profit year after year. This translates to consistently higher stock prices and consistent dividend payouts.

It’s a versatile combination that allows you to either reinvest those dividends and compound the earnings over time or take the dividends as a stream of passive income. On top of that, holding investments for the long term also has some significant tax advantages.

As for intangible benefits, investing in a company you can rely on for the long haul takes away much of the anxiety or worry an investor feels about the volatile stock market.

Should you invest in blue chips or small caps?

It depends on your investment goals. Blue chips tend to be a long-term investment, or to provide an ongoing income stream through dividends. While blue chip stocks tend to be a safer investment, their value doesn’t usually rise much over a short time unless you can scoop them up at a discount during a downturn.

Investing in riskier businesses, or small caps, earn you higher returns with a faster turnaround. When you invest in a small company, you’re betting that it will become the next big thing and multiply your investment as it quickly grows and scales up its revenues.

The benefits of dividends

There are two ways to earn money from stocks: Capital growth in the value of shares over time by buying low and selling high, and earning an income from dividends. Dividends are more often paid out by blue chip stocks, which is part of what makes them so attractive.

A dividend is a company’s way of distributing its profits to shareholders. Dividends are most commonly paid quarterly, though some companies pay them twice a year, annually or irregularly. However, not all companies pay dividends to shareholders and instead invest all of its profits back into the company.

Larger, well-established companies tend to pay dividends. Investors use them to provide a regular, ongoing source of income. This offers you security and stability for the future, while also benefiting from the company’s long-term capital growth. There’s a class of blue chips known as the dividend aristocrats that not only consistently pays dividends but often raises the percentage dividend payout.

How to buy blue chip stocks

1. Choose a stock trading platform. If you’re a beginner, make sure you do your research.
2. Open your account. You’ll need an ID and bank details.
3. Confirm your payment details. You’ll need to fund your account with a bank transfer, debit or credit card.
4. Find the stock you want to buy. Search the platform and buy your shares.

Tips when choosing stocks

Make a plan

• Before you start buying or selling stocks, consider exactly what you want to achieve with your portfolio and in what timeframe. Once you have a plan in place, you can then choose your investments accordingly.

Don’t panic

• Stock markets fluctuate all the time — look at historical graphs charting the performance of the Euronext for proof of this — so don’t panic at the first sign of stock prices heading south. Stick to your plan and ride out any dips or down periods.

Consider your investment goals

• Are you looking for stocks to provide capital growth or to generate income? Smaller companies tend to focus more on growth and therefore reinvest profits into their business, while larger companies tend to pay dividends to their shareholders.

Don’t forget about dividends

• Dividends can provide a stable source of ongoing income during uncertain financial times. Look at companies with a history of paying high dividends to shareholders to see whether they could provide an attractive investment option for you.

Choose companies wisely

• Blue chip stocks, also known as large-cap companies, tend to offer secure, stable returns and a minimal level of risk. Smaller companies outside the major indexes may provide larger growth potential, but they also come with a much higher level of risk.

Research before you buy

• Looking at a company’s annual reports, earnings and historical performance helps you form a clear picture of whether it’s a sound investment. If you’re using an online trading platform, you could access research reports and buy or sell recommendations for various companies.

Diversify your portfolio

• Demographics, trends and events affect businesses in different ways, so a portfolio that covers a wide range of business types, industries and locations provides a better balance of risk and return than a portfolio that’s concentrated in just a few areas.

Consider other investment options

• Depending on your investment goals and appetite for risk, consider other options, such as real estate, bonds, options, precious metals, life insurance, mutual funds and exchange-traded funds (ETFs). ETFs are bought and sold in brokerage accounts just like stocks, but they allow you to gain exposure to an index or other group of underlying assets.

Bottom line

Investing in the stock market is never risk-free, but blue chip stocks are historically less volatile. If you’re interested in buying stocks, compare investing platforms to find one with fees and minimums that match your investing goals.

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