Blue Chip Stocks
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The stock of a company that is in excellent financial condition and is a leading player in its sector is called a blue chip stock. These high-quality stocks are considered a lower risk investment. Blue chip stocks get their name from poker, in which the counters that have the highest value are blue in color. Some of the most popular blue chip stocks are IBM, Microsoft, Wal-Mart, Coca-Cola, Exxon-Mobile and Gillette.
Features of Blue Chip Stocks
There are no specific criteria for blue chip stocks. The most common characteristics of such stocks include:
- 1. Revenues: Companies with revenues higher than that generated by industry peers.
- 2. Earnings: Companies that have been generating healthy earnings on a consistent basis.
- 3. Dividends: Companies that pay regular dividends to common stockholders, even if their performance has been unsatisfactory in a particular period. Moreover, the dividend payout is raised at regular intervals.
- 4. Balance Sheet: The balance sheets are robust and their debt liabilities are not extensive.
- 5. Credit Rating: Their credit ratings in the bond and unsecured debt markets are high.
- 6. Size: The market capitalization of these companies is higher than that of other companies in the same industry.
- 7. Product Portfolio: They have extensive and diversified product lines. They also have a wide global presence.
- 8. Competition: They are cost efficient, with high distribution control and excellent franchise value, all of which contribute towards their competitive advantage.
How to Invest in Blue Chip Stocks
There are several ways of purchasing blue chip stocks. These include:
- 1. Directly from a broker. One can opt for a direct stock purchase plan or a dividend reinvestment plan to acquire blue chip stocks.
- 2. A mutual fund that specializes in blue chip stocks.
- 3. Investing in the Diamond, a popular ETF (exchange traded fund). By buying a share of the Diamond, you purchase a fraction of all the thirty stocks in the US-based Dow Jones Industrial Average (DJIA) index. Given their low expense ratio, limited management fee and high tax efficiency, the Diamonds are preferred to blue chip mutual funds.
Find out more about Blue Chip Stock Investment.