Blue-chip stocks are one excellent source of a steady income. While they lack the growth quality that makes many startups attractive, they have proven themselves capable of generating consistent returns over a long period, making them an essential part of investors’ portfolios.
Blue-Chip Stocks Explained
A blue-chip stock refers to an investment with a solid record of steady growth and stability. It is a common stock usually owned by a well-established company with consistency and a solid business model.
While the returns of blue-chip stocks are not as high as skyrocketing startups or today’s top cryptocurrencies, they are excellent at delivering steady returns to investors over the long term.
Moreover, blue-chip companies tend to pay dividends, meaning their stocks could help traders turn a solid profit.
Characteristics of Blue-Chip Stocks
Blue-chip stocks have proven themselves through the years. There are no specific requirements for a stock to be considered blue-chip. Instead, it can be determined based on certain characteristics, including:
Growth History
Blue-chip companies are reliable, with a long, excellent history of earnings and performance. They are usually household names in their industries that have shown their ability to weather and succeed in recessions and market slumps.
Market Capitalization
Blue-chip stocks tend to be large-cap stocks, with market valuations of more than $10 billion. They are often traded on major stock indices, such as the S&P 500, the Dow Jones Industrial Average (DJIA), and the NASDAQ 100.
Dividends
Many blue-chip companies pay dividends regularly, as they have an excellent cash flow, which a part of it is returned to their shareholders in the form of dividends.
Benefits to Investing in Blue-Chip Stocks
Stability
Blue-chip stocks are stable since their companies have been doing business in their respective industries for decades. That means they are not quickly going away, as they have the resources and cultural cache to weather challenging market situations and continue generating returns.
Dividends
Blue-chip stocks’ ability to offer regular dividend payments makes them an attractive investment to retirees and income investors. Therefore, it is not necessary to invest mainly for income.
With a dividend reinvestment plan (DRIP), traders can convert their earnings into more shares of a blue-chip stock and accelerate the growth of compounding returns.
Less Management
Managing and keeping track of blue-chip stocks are not as strict as other stocks, making them ideal for traders who would like to take a set-it-and-forget-it approach with some of their investments.
Factors to Consider Before Investing in Blue-Chip Stocks
Cost
Investing in blue-chip stocks can be more costly than non-blue-chip ones since they are renowned companies. Still, traders have the option to own fractional shares of several blue-chip stocks with the help of brokerage firms.
Returns
Investors should note that they may not receive high returns or see substantial short-term growth with blue-chip stocks due to their high share prices and decades-long presence of the firms that own them. Instead, what they can expect to receive and see is steady build-on returns in the long run.
