A blue-chip stock is one from a large corporation that is well-established and financially sound. These stocks are earmarked for a history of reliable performance, stability, and leadership in their respective industries. They are known to pay regular dividends, considered less risky, and often work as a buffer (or a form of protection) in portfolios for the long-term.
Key characteristics of a blue chip stock
| Large market capitalization | Usually industry-leading companies with market caps in the billions |
| Financial stability | Strong balance sheets, steady revenue growth, and high credit ratings allow them to navigate economic downturns |
| Dividend | A consistent history of paying dividends, offering steady income to investors. However, not all blue chips offer a dividend. |
| Market leadership | Usually the dominant player in their sector with a reputation for high-quality product/services |
Five Canadian blue chip stocks
- Royal Bank of Canada (RY)
- Enbridge (ENB)
- Canadian National Railway (CNR)
- Fortis (FTS)
- Alimentation Couche-Tard (ATD)
Five U.S. blue chip stocks
Dividend Aristocrats and Kings
A Dividend Aristocrat is an S&P company with more than 25 consecutive years of dividend increases. An example would be Enbridge (ENB).
A Dividend King is a company that has increased their dividend payment for more than 50 consecutive years. An example would be Procter & Gamble (PG).
Both categories are an elite subset of reliable, high-quality blue chip stocks. These companies focus strictly on their record of raising dividends, and offering growing payouts that combat inflation. These types of stocks are ideal for income-focused investors, especially those worried during downturns. They tend to be resilient companies that have weathered all the stages of an economic cycle.
Reinvesting dividends from high-quality stocks can also enhance long-term wealth and compound returns.
How to invest in a blue-chip company
Investors are able to buy individual stocks, for example Apple or Coca-Cola, or there is the option to use ETFs or mutual funds to gain diversified exposure to the top-tier companies. For example, an investor could consider an ETF that tracks the S&P 500 or S&P/TSX.
There is also the option to invest in only the best of the best through ETFs tracking the top 30 or 60 companies.
If an investor is solely interested in companies with a record of raising their dividends, there are ETFs that solely follow Dividend Aristocrats and Kings.
Is a blue chip safe?
Generally, a blue chip would be considered a safer, lower-risk equity investment due to the long history of stable earnings, industry leadership, and regular dividend payments.
However, while these are durable stocks that tend to recover quickly from a downturn, no stock is risk-free. All stocks can experience volatility and losses in a decline, or amid poor management, tech disruptions, or competitive pressure.
These can be great stocks to have in your portfolio long-term, but it is important to diversify your portfolio into other asset classes or sectors to rebalance risk. – and to always speak with an advisor.
Even a “safe” blue chip can be risky if it is overly recommended, since that can lead to an overinflated price.
A premium valuation can pose risk for future returns, because price is the ultimate determining factor of risk – and if investor enthusiasm drives pricing to an unsustainable level, then a good investment can become a poor one.
