At the poker table, a blue chip is typically worth $10. In your brokerage account, blue chips are worth far more.
Blue-chip stocks are premium quality equities—large, mature companies with a reputation for stable growth and consistent shareholder returns. They’re often the safest and most predictable assets you can buy on a stock exchange.
What Makes A Blue-Chip Stock?
If you ask ten investors the definition of a blue-chip stock, you're likely to get several different answers. Some will say blue chips are the members of the elite Dow Jones Industrial Average (DJIA) index. Others may define blue chips as dividend-paying, mega-cap stocks. (A mega-cap is a company with a market capitalization of $200 billion or more.)
Unfortunately, the DJIA definition of blue chips isn't terribly descriptive. That’s because there are no quantitative rules governing stock selection for the index. An index committee picks who's in and who's out. Its only published guideline is that the DJIA represents the top 30 stocks across all sectors except transportation and utilities—with a focus on reputation, track record of growth and trading volume.
The mega-cap definition of blue chips, on the other hand, is more concrete. It also opens the door to large dividend-payers that aren’t in the DJIA. It also excludes DJIA companies that don’t pay dividends, of which there are currently three.
No matter where you draw the cutline for this group, most investors agree that blue-chip stocks share these characteristics:
- Decades-long history of growth
- Proven ability to manage through economic downturns
- Market capitalization of at least $10 billion
- Strong cash flow
- Manageable debt
List Of Blue-Chip Stocks
The table below lists 40 dividend-paying companies that are DJIA members or have a market cap of at least $200 billion.
As you can see, there are 27 DJIA members in this group, plus 13 mega-cap dividend stocks that aren’t in the DJIA. Three Dow stocks are not included: Boeing, Salesforce and Walt Disney don’t currently pay a dividend.
- Boeing suspended its long-time dividend in 2019. The company needed to preserve cash after the 737 Max jet crisis. Two 737 Max jets crashed, and Boeing grounded the entire fleet. The aerospace company has struggled with profitability since, but its outlook has recently turned positive.
- Salesforce does not pay a dividend and has not announced plans to initiate one.
- Walt Disney suspended its dividend in 2020, the same year its theme parks and cruise line closed temporarily due to the pandemic. In a 2023 earnings conference call, Disney CEO Bob Iger announced his intention to reinstate the dividend later this year.
Reasons To Invest In Blue-Chip Stocks
Blue-chip stocks have size on their side, along with strong balance sheets and proven business models. Those qualities tend to translate into three important investor benefits: stability, dividends and ease of ownership.
Stability
Blue-chip stocks aren’t as volatile as smaller, younger companies. They typically manage downturns with a been-there, done-that pragmatism. Many have been operating for decades and have powered through all types of financial market and economic crises. They have highly experienced and disciplined leaders who know what levers they can pull to address changing conditions.
That stability runs both ways, of course. While blue chips can be more resilient in downturns, they don’t have the growth potential of smaller companies.
A quick comparison between the DJIA and the S&P 500 over different time frames demonstrates how this can play out. Over the past year—a tough time for investors–the DJIA's total return with dividends reinvested is 0.36%, compared to a loss of -5.31% for the S&P 500. Over the past 10 years, the Dow's cumulative total return of 181.2% trails the 209.45% return for the S&P 500.
Dividends
Blue chips have the size, financial strength and cash flow to pay dividends. Those dividends are a primary reason why these stocks deliver higher total returns in soft markets.
Dividends are a more definite and predictable source of return than stock price appreciation. Once the dividend payment is in your account, it's yours—and you didn’t have to sell the stock in the process.
Gains that come purely from stock price increases, on the other hand, can be elusive. Those gains aren’t definitively yours until you liquidate the position.
Easy To own
Blue chips don't often experience negative, fundamental changes that would inspire investors to sell immediately. As such, they are suitable for buy-and-hold investing. These are the stocks you carry through downturns because you know they'll come out the other side. They’re also the stocks you can reasonably ignore when you don't have time to babysit your investment portfolio.
That’s not to say blue chips are immune to challenges. They can face serious business disruptions, as Boeing and Disney have in recent years. Fortunately, they have access to capital, financial strength and experienced leadership on their side. These resources allow them to work through disruptions more effectively than a smaller company could.
How To Choose Blue-Chip Stocks
When choosing blue-chip stocks for your own portfolio, strive for sector diversity first. You don’t want your wealth resting entirely on Chevron and ExxonMobil, for example.
Also consider your own investing goals. If dividend income is a priority, lean into the highest-yielding blue chips. Or, if you need to manage your tax burden, opt for the lowest-yielding blue chips.
Finally, remember that blue chips are long-term plays. You might rely on current conditions to narrow your list of options today, but plan on holding these positions through bear and bull markets. That's how to realize their full value.
List of Recommended Blue Chip Investments
The table below shows five blue chips analysts like for 2023.
Apple AAPL
Apple has a loyal customer base and a reputable line-up of computing products that work seamlessly together. The iPhone maker also has a solid track record. Even though Apple is down about 2.5% over the last year, the company’s 15-year, annualized return is nearly 26%.
As reported by Bloomberg in January, 2023, Apple’s making some key changes in its iPhone division, which accounts for more than half the company’s revenue. Apple will reduce its dependency on screen suppliers by increasing in-house production. The move stands to lower costs and improve the product.
Apple made a similar change in 2021 with its Mac computer, replacing Intel processors with a more powerful Apple chip. CEO Tim Cook later said in an earnings call that the switch contributed to a 70% increase in Mac sales.
In its fiscal year 2022, Apple grew net revenues 8% to $394 billion. EPS also grew 8% to $6.15 from $5.67.
Procter & Gamble PG
Procter & Gamble makes essential household products, things like shampoo, razors, toothpaste, diapers and toilet paper. That line-up of necessities insulates PG from downturns–since people keep buying diapers and toilet paper even when times are tough.
In recent years, PG has invested heavily in technology to improve and streamline operations. Through those efforts, PG’s gross margin steadily increased between 2019 and 2021. The trend reversed in 2022, as the company faced cost inflation and negative currency trends. Even so, PG continues to produce lots of cash–enough to fund $8.8 billion in dividends and $10 billion in share repurchases in fiscal year 2022.
PG reported fiscal 2022 non-GAAP organic sales growth of 7%, along with non-GAAP core EPS growth of 3%.
UnitedHealth Group UNH
UnitedHealth is one of the largest healthcare companies in the U.S., thanks to a string of acquisitions that have added depth and diversity to its operations. The company insures more than 51 million people and expects to add at least one million over the next year.
That massive membership base is a competitive advantage for UnitedHealth, one the company can use to sell more services. UNH is also leveraging technology to improve outcomes and lower costs.
In its fiscal year 2022, UnitedHealth grew revenues by 13%, earnings by 19% and EPS by 17%. The healthcare giant expects 2023 revenues of $357 to $360 billion, up from 2022 revenue of $324.2 billion.
Visa V
Visa has very high net margins, fluctuating around 50% since 2018. That efficiency supports ongoing investment in Visa's global financial network as well as share buybacks and dividend payments.
Since Visa makes its money on transaction fees, the company performs well when spending rises. That's a good thing, since the economy generally grows more than it contracts. But Visa also performs well in inflationary environments. Higher prices raise average transaction values, which in turn generates more fees.
In its fiscal 2022, Visa grew revenues by 22% and non-GAAP EPS by 27% on higher payments volume and growth in processed transactions.
Walmart WMT
Walmart and its wholly owned Sam's Club stores sell more groceries in the U.S. than any other company. Since both chains are known for competitive pricing, the company as a whole may benefit if the U.S. falls into recession later this year. In tough economies, shoppers tend to shift their purchases to low-price retailers.
In its fourth quarter fiscal 2023 earnings release, Walmart reported share gains in U.S. grocery, double-digit growth in e-commerce sales, membership increases at Sam's Club and higher revenue and adjusted operating income. Fiscal year 2023 adjusted earnings per share rose to $6.46 from $5.48 in the prior year.
Stocking Up On Blue Chips
Thanks to their relative stability and safety, blue-chip stocks function well as core portfolio holdings—particularly for novice investors and those who prefer low-maintenance stocks. The dividends also ease the stress of bear markets and provide funding to reinvest at the best possible time, when share prices are low.
That reliability means blue-chip stocks are less exciting than, say, artificial intelligence or biotech plays. But for the investor who gets nervous about the ups and downs of the market, that's a great trade-off.
