Generally, the blue-chip stocks are stocks of well-established, reputed companies known for their large market capitalization and long track record of dividend growths and consistent payouts to common shareholders. Many investors benefit from investing in the blue-chip stocks, receive steady dividends payouts and reinvest them. The consistent dividend along with steady returns and less volatility is the reason why investors take a certain interest in the blue-chip stocks.
- What Is a Blue Chip Stock?
Blue chip stocks are shares of very large and well-recognized companies with a long history of sound financial performance. These stocks are known to have capabilities to endure tough market conditions and give high returns in good market conditions. Blue chip stocks generally cost high, as they have good reputation and are often market leaders in their respective industries.
Table of Content
- What is Blue chip stock?
- Understanding the Concept Of Blue Chip Stocks
- How to identify a Blue chip stock?
- Benefits Of investing in Blue chip stock
Understanding a Blue Chip Stock
- While dividend payments are not absolutely necessary for a stock to be considered a blue chip, most blue chips have long records of paying stable or rising dividends. The term is believed to have been derived from poker, where blue chips are the most expensive chips.
- A blue chip stock is generally a component of the most reputable market indexes or averages, such as the Dow Jones Industrial Average, the Standard & Poor's (S&P) 500, and the Nasdaq-100 in the United States, the TSX-60 in Canada, or the FTSE Index in the United Kingdom.
- How big a company needs to be to qualify for blue chip status is open to debate. A generally accepted benchmark is a market capitalization of $5 billion, although market or sector leaders can be companies of all sizes.
- The T. Rowe Price Blue Chip Growth Fund doesn't have a specific guideline for what type of company qualifies outside of focusing on large-cap and mid-cap companies that are well-established in their industries, although the median market cap of the fund's holdings has historically been in the range of close to $100 billion.
How To Identify Blue Chip Stocks?
To recognize, one needs to shortlist the blue-chip stocks out of thousands and look out for certain things which are as follows...
- Check for Market Capitalization
If you are looking to invest in the blue-chip stocks but don’t know where to begin then the first thing you must do is to check for the market capitalization of the companies. As earlier, we mentioned that the blue-chip stocks are generally the stocks of well-established companies with large-market capitalizations. As per domestic market regulator, Securities & Exchange Board of India (SEBI), there are around 500 companies with the large-market capitalizations. These companies are quite large in terms of capitalizations, management, business models, and have a long track record of performance over the years.
Check for Compound Annual Growth Rate (CAGR), Equity-Debt Ratio, ROCE, and Interest Coverage Ratio
To recognize the blue-chip stocks among such large-cap companies, you need to check for the CAGR of companies individually. This metric tells about how the consistency in the growth of earnings which impact the overall growth of the company. With CAGR, also check for other metrics such as equity-debt ratio, return on capital employed, and interest coverage ratio, etc.
- Check for Growth in Dividend Payments
When a company pays uninterrupted dividend payments to its common shareholders, it reflects the company’s performance, profitable business, and management’s attitude towards its shareholders in sharing profits. So, if a company has a good track record of paying consistent dividends it is a good sign of a blue-chip company.
- Check for Participation of Institutional Investors
Last but not least, check for the participation of institutional investors. It is because the participation of insurance and domestic & foreign mutual fund companies is a typical blue-chip trait. After identifying, one can invest in the blue-chip stocks of the company they found and initiate blue-chip investments accordingly
Hope, the information provided within the article will allow you to recognize the blue-chip stocks.
Benefits of Investing in Blue Chip Stock
Some of the key traits that attract investors towards blue-chip stocks are as mentioned below....
- Superior returns: Since blue chip are industry leaders, they have higher chances of growth and therefore can deliver higher returns.
- Low Volatility: Blue Chip stocks are of companies that are financially sound with competent management & strong corporate governance practices. This makes the companies stable and less affected by market volatilities.
- Regular Income Through Dividends: Blue Chip investment belong to companies that have huge cash surplus and can offer regular dividends to the investors.
How Do I Invest in Blue Chip Stocks?
- A market participant can buy blue chip stocks individually, or by buying mutual funds or exchange-traded funds (ETFs) that invest in blue-chip stocks. In some cases, funds and ETFs will hold a variety of stocks and asset classes, including blue chips. In other cases, the funds or ETFs might be focused exclusively on blue chips, such as an ETF that tracks the Dow Jones Industrial Average, which comprises 30 of the largest blue chip stocks.