Q: I’m new to investing and have heard the term “blue chip” used in reference to certain stocks. What exactly is a blue chip stock?
Blue chip stocks are the best of the best in the stock market. They are representative of companies of high quality. Blue chips are favored by investors who want to balance low-risk investing with long-term growth potential and income.
Generally, blue chip stocks have a long-established history of profitability and growth. Most (but not all) pay dividends, and have done so for many years, often with annual increases. Blue chips are generally among the largest companies in their industry.
Good examples of blue chip stocks include companies like Nike, ExxonMobil, Johnson & Johnson, and Microsoft. All of these businesses are profitable year after year and have excellent track records of stable dividend payments. Plus, they’re titans of their respective industries.
On the other hand, companies like Netflix and Tesla are generally not considered blue chips. They are large and wildly popular stocks, but they aren’t the biggest players in their respective industries, nor do they have an established record of profitability. Additionally, they don’t pay dividends to shareholders, and most blue chip investors want income from their investments.
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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NFLX and TSLA. The Motley Fool owns shares of JNJ and has the following options: short October 2018 $135 calls on JNJ. The Motley Fool recommends NKE. The Motley Fool has a disclosure policy.