Why Every Stock Portfolio Should Include Blue Chip Stocks

There are many great companies, but not all great companies are created equal. There’s super, and then there’s blue chips. There are no universal criteria to qualify as a blue chip stock, but in general, blue chip stocks are large, well-established companies that are leaders in their industry and have large bank accounts. Even by the highest standards, blue chip stocks have managed to stand out.

Consider companies such as Apple, Coca Colaand walmart, for example. Over a billion people around the world use an iPhone, Coca-Cola’s classic soda is easily the world’s most recognizable drink, and you can’t venture into most cities in the United States without seeing an iPhone. Walmart store.

If you are an investor, your portfolio should include blue chip stocks. Here’s why.

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The title is well deserved

Top notch companies earn this title by proving themselves to be strong companies that can consistently lead their industries and make good money doing it. If you’re an investor, this ticks two of the most important boxes you could ask before making an investment decision. With the uncertainty that comes with investing in the stock market, the reliability of a blue chip security can be comforting.

This does not in any way mean that blue chip stocks are risk free or infallible; just look General Engines‘ Bankruptcy of 2009. But due to their size and resources, you can be sure that the overwhelming majority of blue chip stocks will find a way to weather short-term economic storms. It may not be today, next month, or even next year, but at some point big companies find their way to better days.

If you are risk averse, look no further than top-rated exchange-traded funds (ETFs). You’ll be exposed to blue chip companies, but your risk will be spread across many companies instead of depending too much on the success (or lack of success) of a few companies.

It pays to hold them

Dividends have nothing to do with labeling a company as a blue chip stock, but many of them pay dividends, and some have stable dividends that increase every year. It’s much easier to ignore short-term price fluctuations when you know you’re still receiving your quarterly dividend.

Investing and building a significant stake in blue chip stocks over time can turn your dividend payouts into good supplemental retirement income. At an average dividend yield of 2.5%, every $100,000 would yield $2,500 per year.

Still need to diversify

Part of having a well-diversified stock portfolio is having companies of different sizes. After all, it’s good to invest in household names, but those same companies used to be much, much smaller – and there’s a lot of money to be made in that growth. Amazon was far from a blue chip stock in January 2000, but every $1,000 invested in the company then was worth more than $40,000 today. Investors who might have overlooked Amazon because they focused only on blue-chip stocks likely missed out on one of the biggest wealth creators this generation has ever seen in the stock market.

Now, should we expect to find the next Amazon like a diamond in the rough? Absolutely not. It would be nice, of course, but you shouldn’t expect this. Ideally blue chip stocks are a core part of your portfolio, but not all of it. You want to give yourself a chance to take advantage of the high growth potential of small businesses.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. stefon walters holds positions at Apple. The Motley Fool has positions and recommends Amazon, Apple and Walmart Inc. The Motley Fool recommends the following options: January 2024 long calls at $47.50 on Coca-Cola, March 2023 long calls at $120 on Apple and short March 2023 calls at $130 on Apple. The Motley Fool has a disclosure policy.

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