The term “blue chip” has its origins in the game of poker. In poker, blue chips traditionally represent the highest-value chips.
Blue chip stocks are well-established companies with higher market capitalisations.
They’re generally considered reputable and financially stable for long-term investment.
They will often pay regular dividends and are widely considered safer investments than smaller speculative high-risk companies.
Let’s take a look at some examples of blue-chip stocks on the ASX:
1. Commonwealth Bank of Australia (ASX:CBA)
CBA is one of the largest banks in Australia – and has a market cap of $167.7 billion. It pays regular dividends – recently about 4.65 per cent. While the stock has had ups and downs over the years – it has increased in value by nearly 70 per cent over the past 20 years.
2. BHP Group (ASX:BHP)
BHP is a global mining and exploration company, known for minerals including iron ore, coal, copper, and oil. It paid dividends recently of about 5.8 per cent (5.79 per cent). The value of its shares is up almost 75 per cent over two decades.
3. Telstra (ASX:TLS)
Telstra is Australia’s largest telecommunications company, providing phone and data services for millions of Australians – it has a market cap of more than $43 billion and pays dividends which lately has been about 4.45 per cent (4.46 per cent).
4. Woolworths Group (ASX:WOW)
Woolworths has a market cap of nearly $46 billion – and the value of its shares has grown by nearly 75 per cent (by 74 per cent) in the past 20 years. So if you invested $10,000 into Woolworths in 2003, that investment is now worth $17,400!
Now: you might be wondering, what should you consider when buying shares in companies like these?
Risk appetite – are you looking for stability, or the next ten bagger?
Risk vs. reward
The more risky an investment is, the more there tends to be the potential for greater reward. For example, a stock worth 5 cents can very easily double or triple in price, meaning there is a greater reward on the upside, compared with a stock that’s already $5 or $10. But it’s important to note, these non-blue chips can just as easily crash from 5 cents to absolutely worthless.
Expectancy of growth
Blue chip stocks are steady risers, there are fewer catalysts for strong short-term share price spikes than with those speculative buys that may double in a day with events such as an exploration company making a major discovery, a biotech making a medical breakthrough, or a company becoming profitable for the first time. In simple terms, short-term gains are harder to find with blue chip stocks.
Income – Is this blue chip company issuing dividend payments – and if they do – what’s the yield?
And just like any stock you buy, it’s good to think about timing and do some research: what domestic, global, and geo-political factors are likely to affect the company’s performance moving forward? How has the company been performing – what are its debt and profit positions?
How’s the company’s leadership performing? What are the threats and opportunities?
Check out a few charts, and make sure you’ve done your research.
And before we wrap up, we shall leave you with the very words of world-famous casino expert Mark Pilarski, who once said:
“The smarter you play, the luckier you’ll be”
Mark Pilarski