What Are the Benefits of Blue-Chip Stocks?

What Are Blue-Chip Stocks?

Blue-chip stocks are shares of large, established, and financially stable companies that have been around for a long time. The term “blue chip” comes from the game of poker, where a blue chip holds the highest value.

For investment professionals, a blue-chip stock is usually associated with a highly valued and well-known company with characteristics that benefit investors over the long run. These benefits include stable cash flows, consistent dividends, and the potential for growth.

Key Takeaways

• The term “blue chip” comes from poker, where the blue chip holds the highest value.
• So called blue-chip stocks are shares of large, established companies with solid financials and consistent dividends.
• Since many blue chips are large companies with familiar names, investors typically invest in them with confidence, believing that these stocks will be the first to rebound after a bear market.
• Consistent dividend payouts over the years can help add an element of stability to share prices as well.
• Blue-chips are usually highly liquid and their prices can be less volatile than those for other stocks.

Benefits of Blue-Chip Stocks

Stability and Profits

Many investors understand that companies with blue-chip stocks have stable earnings. During an economic downturn, investors may turn to these perceived safe havens for that stability of earnings and growth.

Some people believe that blue-chip companies offer stability and security during periods of slower growth due to their experienced executive teams and their ability to generate stable profits.

In a bear market these well-established, popular names will likely be among the first to recover. There is seemingly less risk that they will go out of business during an economic downturn.

Typically, a company with blue-chip stock is large in size (with a market capitalization in the billions) and a leader in its sector or industry.

Due to size, success, and longevity, the company gives investors added confidence when they add its stock to their portfolios.

Growth Potential

Companies with blue-chip stocks tend to offer solid growth potential even though they may be large, mature companies. Many steadily reinvest profits in their companies to support further growth. This can produce capital appreciation, which is very attractive to many investors.

Consistent and Increasing Dividend Payments 

Since blue-chip shares are typically associated with mature companies that have achieved large market caps, most pay dividends.

Dividends represent the portion of the company’s profits that is distributed to shareholders in the form of quarterly payments.

In the long run, the benefit to the shareholder from dividend payments is portfolio income, which is forthcoming regardless of the daily swings in the share price.

Dividend payments can also help to protect against the adverse effects of inflation because dividends represent earnings, which can increase along with the general cost of living. Investors often look for companies with dividends that increase over time.

Small, Fast-Growth Companies

Smaller companies that are growing fast typically retain all of their earnings in order to invest in future growth. These growth stocks may eventually pay dividends once they are of sufficient size and have the opportunity to reward their investors.

Larger, More Mature Companies

A blue-chip stock, on the other hand, may be labeled as such when a company has paid uninterrupted and increased dividends over a long period of time.

Diversification

Blue-chip stocks can help investors to diversify their portfolios against more volatile investments and reduce the risk of loss.

Less Volatility

Another benefit for many investors is that blue chip stocks usually don’t have volatile price movements, as compared to other stocks in volatile trading sessions. So investors can sleep at night, and, if needed, can sell shares that usually have maintained their value or retained much of it.

Liquidity

Blue-chip stocks are a liquid investment. Because they’re popular with both individual and institutional investors, they trade often. That means that, generally, investors can buy or sell them at will and as needed.

Do All Blue-Chips Pay Dividends?

Not necessarily, although most do. Part of the attraction of blue-chips is that they pay dividends and those dividends increase over time.

What Blue-Chip Doesn’t Pay a Dividend?

One very well-known blue-chip company that doesn’t pay dividends is Berkshire Hathaway (BRK.A, BRK.B). That’s because its CEO, Warren Buffett, invests all profits back into the company to further its growth. The company’s investors don’t seem to mind, as that has driven the stock’s price to sky-high levels over the years (on Jan. 23, 2025, it traded at $692,830 per share).

What Kind of Investor Would Be Interested in Blue-Chip Stocks?

An investor interested in companies that have demonstrated financial soundness for years, have stable earnings, pay dividends, and offer growth potential over time should take a look at blue-chips for a portion of their portfolio.

The Bottom Line

Blue-chip stocks typically have solid balance sheets, steady cash flows, proven business models, and a history of dividend payments and increasing dividend amounts.

For that reason, investors generally consider blue-chip stocks to be among the most secure stock investments.

So, while blue-chips are not immune from losses if the broader stock market enters a bearish phase, these names may be less volatile than smaller growth companies and may likely be the first to rebound when the market eventually recovers.