Buying a stock means getting into some risky business. Sure, they can help you earn money that you could put toward many things – a retirement account, an emergency fund, a down payment – but you also run the risk of putting yourself in hot water if the company you’ve invested in goes under. But some stocks are riskier than others. If you’re risk-averse, you may want to consider blue-chip stocks.
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Blue-Chip Stock Basics
Just about any group you can think of has its all-stars that lead the rest of the pack (think baseball). Stocks are no different. The name “blue-chip” is said to be a reference to the game of poker, in which the blue-colored chips are worth more than the others. So if you’re looking to invest in some top-quality shares, you may not have to look any further than blue-chip stocks. They’re usually well-known companies that stand out from competitors in their industries. Investing in one of these blue-chip stocks will usually be less stressful for the risk-averse investor.
Why? Because blue-chip companies often have a firm footing in the economy with large revenues and total shares worth billions of dollars. They’ve usually been around a while with a proven track record of doing well financially. Blue-chip growth tends to be slow and steady, so these stocks are considered to be safer than those tied to smaller-cap companies. Still, history has shown us that even this type of stock can nosedive in the event that the market crashes.
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How to Invest in Blue-Chip Stocks
Investors beware: there is a catch to dealing with the big, successful corporations that issue blue-chip stock. Investing in a share of blue-chip stock can be pricey. And even though your dividend could be high, your total return (the benefit of investing compared to its cost) might actually be fairly low. Another disadvantage to buying into blue-chip stocks could be their slower moving pace, especially if you’re on a mission to find a set of stocks that are going to increase in value quickly.
If you want to keep track of how blue-chip stocks are doing on a regular basis, take a look at the Dow Jones Industrial Average. This is a price-weighted average that lists 30 blue-chips stocks. Or check out another market index like the S&P 500 Dividend Aristocrats or the Nasdaq-100.
In order to buy a share in one of these prominent companies, you can purchase one at a time through a broker, a dividend reinvestment plan or a direct stock purchase plan. A dividend reinvestment plan (also known as DRIP), works just like it sounds. If you’ve already received dividends from investing in another stock, you’re simply using those funds to buy another share instead of having the money deposited into a different account for personal use.
Direct stock purchase plans aren’t available for every single large-cap company. But if a direct stock purchase plan is available for the one you want to invest in, you’re essentially buying a share straight from a corporation instead of going through an intermediary. If one blue-chip stock isn’t enough for you, it’s also possible to buy a whole group of shares via an exchange-traded fund (ETF) or a mutual fund.
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The criteria for becoming a blue-chip stock isn’t set in stone. The companies that have made the list are fairly large businesses that are highly valued in the market, have consistently had high earnings, have good credit and have made their shareholders plenty of money in dividends for years. It’s an exclusive club that doesn’t frequently change or add new members. The averages committee manages the list of stocks for the Dow. The last change – replacing AT&T with the tech giant Apple – was the first shift to take place in a while. It was big news at the time (in March 2015).
Blue-chip stocks cut across various industries and some notable ones include Walmart, American Express, Nike, Microsoft, Home Depot, JPMorgan Chase and Exxon Mobil. There is no official ranking of which blue-chip stocks are the best (as that could change), but some of the top 10 stocks with the biggest dividends paid to investors include American Capital Agency Corp., Southern Copper Corp., NuStar Energy, AT&T, STMicroelectronics N.V. and Lockheed Martin.
The Bottom Line
Investing in the stock market by choosing individual stocks takes time and expertise, and research shows it doesn’t even boast a track record of beating index funds over time. If you’re not very experienced, there may be other strategies that you could use to build a diversified portfolio of stocks and bonds. But if you happen to make enough money to afford an expensive blue-chip stock, it will likely offer a stable source of extra income, at least in the form of dividends.
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