What Exactly Are Blue Chip Stocks?
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The concept of a blue chip stock is something that all investors seem to inherently understand. However, in the past month I really started to question what blue chip really meant. I am a Citigroup shareholder and I think that the company is regarded as a blue chip stock, the same way that Procter & Gamble and Coca-Cola are. However, Citigroup did not feel much like a blue chip stock this month as it dropped around 20.5%. So I did some research and here were some of the various definitions of a blue chip stock:
From Wikipedia: A blue chip stock is the stock of a well-established company having stable earnings and no extensive liabilities. The term derives from casino, where blue chips stand for counters of the highest value. Most blue chip stocks pay regular dividends, even when business is faring worse than usual. They are valued by investors seeking relative safety and stability, though prices per share are usually high. Typically, such stocks are perceived to offer reliable returns, low yield and low risk. Many blue chips are components of popular indices, such as the Dow Jones Industrial Average and the S&P 500.
From Investopedia: Stock of a well-established and financially sound company that has demonstrated its ability to pay dividends in both good and bad times. These stocks are usually less risky than other stocks. The stock price of a blue chip usually closely follows the S&P 500.
Comment: Before I go on, I just have to comment on the Wikipedia entry – although I cannot confirm it, I suspect that the low yield comment is in reference to the fact that blue chips are often priced highly in the market which drives their yield lower.
Interesting, both definitions speak about low risk. I would say that Citigroup carried some risk in the past month! They also talk about stability and the company being fundamentally strong. Perhaps Citigroup in not the blue chip that I thought it was.
(Photo Credit: Kevin van der Draai)
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9 Comments on this post
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moneygardener said:
Starting on January 14, 2007 – March 10, 2007 Procter & Gamble’ share price fell about 55%. I wish I was investing back then… Does this take away its status as a blue chip stock? Bad things happen to good companies, whether they are truly bad or the market perceives them as bad. Citigroup is most certainly a blue chip company. It will be paying dividends and growing 10 and 20 years from now, and will probably still be considered a relatively safe investment.
December 8th, 2007 at 12:39 pm -
FourPillars said:
Very interesting post and good comment from MG.
I think people get “blue chip” confused with “bonds” sometimes….
When I think about “blue chip” I think about safety of earnings over the long term. Like MG says, there is going to be volatility with the best companies which is why the short term is not as important. Even with blue chips, as with bonds you need some diversification because not every blue chip is going to be around in 20 years.
Mike
December 8th, 2007 at 1:00 pm -
thewild1 said:
It is a very interesting concept, and I guess we will see if Citigroup is really a blue chip stock in the long run.
December 8th, 2007 at 3:06 pm -
the wind said:
It is very nicely soughted out concept. But sometimes it happens that the companies which are considered to be the blue chip companies perform bad but yet they have the capability to come of the bad situation and carry on the business leads that may be it would have existed our blue chip concept yet one of the sustaining company during bad times.It is said to reach at the top is easy but to maintain that position is very difficult.
May 15th, 2009 at 7:22 am -
the wind said:
the companies which maintain themselves during this period are said to be true blue chips as they didnt file bankruptcy as the cases with most of the companies during this period.
May 15th, 2009 at 7:24 am
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[...] What Exactly Are Blue Chip Stocks?By The Dividend GuyThe concept of a blue chip stock is something that all investors seem to inherently understand. However, in the past month I really started to question what blue chip really meant. I am a Citigroup shareholder and I think that the …The Dividend Guy Blog – http://www.thedividendguyblog.com [...]
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