Imagine if you were made an offer you couldn’t refuse. The offer is as follows:
You will be given $250,000 to invest. You must invest it in a single corporation and leave it invested in that corporation for 30 years. At that point, if the value of the investment has risen to $1 million or more, you can keep it!
If you do a little math, you will find that the investment only has to increase 5% per year to reach that target. You don’t have to pick the highest-flying stock you know to have a chance to keep the money. You would be better served selecting a corporation with proven staying power. This serves as our introduction to “blue chip” corporations.
Back in the day, blue was the color of the most valuable poker chip. The name gradually came to signify our strongest corporations. Blue chip corporations may not stand out in any one regard. They may not be growing as fast as growth companies or paying dividends as high as income companies. Their share prices may not be rising as fast as the latest darling of investors. All they do is use their market share, financial strength, brand recognition and solid management to grow steadily and continue dominating their markets.
|Suitable for||Investors who are conservative, but want to retain the opportunity to achieve income (through dividends) and growth in the value of their investments (through the share price increasing).|
|Examples||Visa (V), Home Depot (HD), Boeing (BA) plus many of the 30 members of the Dow Jones Industrial Average (DJIA).|
|In the news||GE slides to loss in 4Q, faces SEC probe over $15B charge – January 24, 2018
3 Blue-Chip Stocks at 52-Week Lows: Bargains or Busts? – August 25, 2017
Dow Set To Hit 22,000 At The Open, Charged By Apple Stock Rally – August 2, 2017
Clouds Darken for America’s Blue-Chip Stocks – November 13, 2014
Alcoa, H-P and Bank of America to Be Dropped from the Dow Jones – September 11, 2013
Blue Chip America Mints Money to Spend on Growth, Dividends – July 30, 2010
Dow kicks out GM and Citigroup – June 1, 2009
|Connections||Blue chip corporations are similar to defensive corporations in that they are among the least risky stocks to invest in. In fact, leading defensive corporations can also be considered blue chips.|
|Explorations||The scrap heap of history is littered with blue chips that have fallen from grace. They include: General Motors (GM – bankrupt and reformed using the same stock symbol), American International Group (AIG), Citibank (C), Kodak (KODK), and Xerox (XRX). Do historical research on several of these corporations and determine why each has fallen from grace.|
|A final word
|After reading our opening offer, you may have been tempted to identify Google or Apple as obvious choices. Keep in mind that Google was formed in 1998. It soon overtook Yahoo in search. Can we say with any confidence another corporation or technology won’t come along to take Google’s place?
Finally, some investors argue that there is no such thing as a blue-chip corporation. The two main reasons are:
Agree or disagree, and why?