Blue Chip Stocks and Dividend Yields

November 07, 2022 at 06:00 AM EST

How to invest in blue chip stocks, exactly? The short answer: carefully, just like with any other investment. Investing in blue-chip stocks depends on your preferences, risk tolerance, portfolio objectives and diversification.

When investing in blue chips, it's important to make the right choices. We'll help you learn what you need to do to take steps toward buying a blue-chip stock.

What Are Blue-Chip Stocks?

Blue-chip stocks tend to be the very best companies in their respective industries. Their businesses are large and they typically have many years, if not decades, of successful operations to back up the valuation. The phrase "blue chip" comes from poker because the blue chips have the highest value. If cheap dividend stocks are the goal, blue chips may not be the answer.

In other words, investors looking for value may not want to invest in blue chips because they tend to come with higher price tags than their competitors. For example, McCormick & Company (NYSE: MKC), which has an unblemished 35-year history of dividend increases, trades at nearly 30x its earnings, while the Kraft Heinz Company (NASDAQ: KHC), which does not have a history of dividend increases, trades for only 15x its earnings.

So, what are blue chip stocks? They are the leading companies in well-established industries, a far cry from risky penny stocks.

What Makes a Stock a Blue-Chip Stock?

The qualities that make a blue chip are fairly general but come down to its quality as a business. How long has it been operating? How strong is the brand? How good is the revenue and, more importantly, the cash flow? The longer the company has been in operation, the more established its brand, the better the cash flow, the "bluer" it is. In most cases, blue-chip companies pay dividends as dividend growers because they want investors to buy and hold shares.

Wondering about blue-chip marijuana stocks? Think again. Marijuana stocks have not been around long enough to be blue-chip stocks but some blue chips interested in marijuana.

Are blue chip stocks a good investment? That depends on the investor. Blue-chip stocks are good stocks to invest in but may not be right for all portfolios.

How to Invest in Blue-Chip Stocks

Investing in blue chip stocks is easy. Here are a few tips on how to buy blue chip stocks and build a winning portfolio.

Step 1: Build a watchlist of blue-chip stocks.

The first step is to build a watchlist of blue-chip stocks. The list should be diversified and include stocks you might want to buy. You can put together a watchlist of stocks on many stock news sites, including on MarketBeat.

Step 2: Pick the right blue-chip stocks.

After building the watchlist, do some more research and decide which blue chip stocks are right for you, such as reviewing the fundamentals of each stock you're considering, such as cash flow and return on assets.

Step 3: Wait for the right entry points.

After choosing the target stocks, choose your entry points or attractive price points. Those price points can be used to set limit orders for the blue-chip stocks in a brokerage account.

Step 4: Repeat, choosing the right blue-chip stocks.

After making the first buy, go back to step two and repeat the process. Choose which stock is right, pick a target entry, and set the order. Do this regularly to take advantage of price swings.

Why Invest in Blue-Chip Stocks?

Blue-chip stocks offer stability, safety, and dividends through companies with well-entrenched businesses that have proven they can stand the test of time (and pay dividends while doing it). Blue-chip stocks also tend to be very large businesses, large or mega caps, with deep moats related to their brands, product(s) or industries.

List of Blue-Chip Stocks

What are the top blue chip stocks? Keep in mind that it's important to note that the term "best" can vary depending on the economic conditions and your objectives.

Johnson & Johnson

Plain and simple, Johnson & Johnson (NYSE: JNJ) is one of the world’s largest and most recognizable healthcare companies. The company brings in more than $90 billion annually and has products that range from cotton balls to cancer treatments and everything in between. JNJ stock is also a Dividend King with over 50 years of consecutive annual increases to its credit.

McDonald's Corporation

McDonald’s Corporation (NYSE: MCD) is the world’s largest fast-food operator with operations on every continent except Antarctica. The company runs on a combined business model of company-owned and franchised locations but it owns all the real estate. In terms of sales, it is four times larger than its closest competitor and is also a dividend grower. McDonald’s is not a Dividend King or even a Dividend Aristocrat, but it's well on its way.

Verizon Communications Inc.

Verizon Communications Inc. (NYSE: VZ) is the second-largest provider of mobile phone services in the U.S. and is fundamental to the telecommunications industry. The company formed in 1999 as a joint venture between Bell Atlantic and Vodafone and has since taken the nation by storm. The company has increased its dividend for almost as long as it has been in business and is also on track to become a Dividend Aristocrat.

FAANG Stocks

Many of the FAANG stocks can be considered blue-chips, but not all of them. FAANG is an acronym for five of the best-performing tech stocks from the last 10 years: Facebook (now Meta Platforms Inc.) (NASDAQ: META), Amazon.com Inc. (NASDAQ: AMZN), Apple Inc. (NASDAQ: AAPL), Netflix Inc. (NASDAQ: NFLX) and Google (now Alphabet) (NASDAQ: GOOGL).

Pros and Cons of Investing in Blue-Chip Stocks

As with all investments, there are pros and cons to investing in blue chip stocks. Blue-chip stocks have many attractive qualities but are not suitable for all investment accounts, strategies, or investors. You also want to consider sectors and industries as well. Blue-chip tech stocks don’t perform the same as blue-chip materials stocks or blue-chip consumer staples.

Pros of Blue-Chip Stocks

Let's take a look at the benefits of investing in blue-chip stocks:

Blue-chip stocks are well-established businesses with stable, if not growing, revenue and cash flows.
Blue-chip stocks can be counted on to weather ups and downturns in the economy but may perform differently, depending on sector and industry.
Blue-chip stocks tend to pay reliable dividends and many are dividend growers. In both cases, the distribution can help attract buy-and-hold investors and reduce market volatility.
Blue-chip stocks may come with a deep moat based on product, brand or business.

Cons of Blue-Chip Stocks

What are the downsides?

The biggest con of a blue-chip stock is that it can be dead money in regard to capital gains. In many cases, blue-chip stocks aren't growing anymore. If they are, it isn’t very fast and the growth can be easily priced into the market. This means they may trade within a trading range or have very slow uptrends to drive their share prices.
Blue-chip stocks are not the most active stocks but they are heavily owned and in liquid markets.

Consider a Portfolio of Blue-Chip Stocks

Investing in blue-chip stocks is a great way to build a portfolio. However, not all blue-chip stocks are right for all investors or at all times. Build a watchlist of blue-chip stocks first, then pick the ones that are right and buy them when they present the best opportunities.

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