WHAT IS A BLUE CHIP STOCK? (Dividend Stocks & Income Investments)

- So I recently did a video talking about how to become a millionaire with five dollars a day by investing in a portfolio of blue chip stocks and investment grade bonds, and that video accumulated over half a million views which is absolutely incredible. So I have a lot of new subscribers on this channel and I want to thank you guys for subscribing, first of all, it’s awesome to have a larger community here and I really appreciate that. But I had a lot a lot of people asking me to talk more about blue chip stocks and kind of explain what a blue chip stock is for somebody who has no idea. So I’m gonna be doing a whole video here talking about blue chip stocks. We’re gonna talk about what a blue chip stock is, why a blue chip stock is not actually recession-proof, so they are lower risk but there is still a risk of those companies going bankrupt. Then we’re gonna talk about why people invest in a blue chip stock, and then we’re gonna go over 30 examples of blue chip companies. So let’s get started with this. So what is a blue chip stock? So a blue chip stock is basically the stock of a well established company. This is a financially stable company with a track record. They are longstanding and time tested. So these are companies that have been around for a very long time, these are not brand new companies or startups, these are companies that people have been investing in and putting their hard-earned money into for decades, and they have decades of success. They have a track record that spreads over many decades as well, and they are known for being very responsible with their money and just well run companies that have been returning dividends and profits to shareholders for many, many years. So they usually have a large, or they always have a large market capitalization. Now market capitalization is basically the price per share times the outstanding shares, or basically the value of that company in terms of share price. So you would take the shares outstanding times the share price and you would get a dollar amount. And blue chip stocks are usually companies with a market capitalization exceeding 100 billion dollars. So that is one way you can tell the actual size of a company as to whether they are a small cap, mid cap, large cap, or mega cap stock. You’re going to see most blue chips falling into the category of a large or mega cap stock, exceeding 100 billion dollars in value. Now typically blue chip stocks are paying dividends, so if you’re not familiar with what a dividend is, every single quarter these companies share a portion of their profits in the form of a cash dividend to shareholders. So four times a year they pay out a dividend. Many people have a dividend reinvestment plan or dividend reinvestment program, where the dividends are automatically reinvested back into the issuing stock. But if not, they just deposit that into your actual trading account, into the cash account, and then it’s up to you to either withdraw that money or reinvest it. And I don’t want to beat a dead horse here but I’m sure as you guys know, I encourage you to reinvest those dividends, take advantage of compound interest. But you’re going to find most dividend stocks are blue chip stocks, and most blue chip stocks pay dividends. Now not only do they pay dividends, they have a history o consistent dividends, so they’ve been paying them for many years or many decades in some cases, and they also have a track record of rising dividends. So over time the dividends yield is increasing or the amount they’re paying out in dividends is increasing. Now this is also a company with dependable earnings so you’re not going to see any earnings surprises in most cases, usually they’re meeting expectations and they’re just doing what’s expected. They’re boring, but in many cases, especially with investing boring is good with blue chip stocks. They’re named after the blue chip in poker. So if you want a little piece of trivia, if you’re talking to someone, the reason they’re called a blue chip stock is because the blue chip in poker is the chip with the highest amount of value. So they see these stocks as the stocks with the highest amount of value, that’s why they’re called the blue chip stock. While there is no official list of blue chip stocks, many people use the Dow Jones Industrial Average to get a list of blue chip stocks, because those are some of the industry leaders and that is a very selective list of stocks that are on there, and those stocks have a very large market capitalization. So that’s the list we’re gonna be using here when we talk about some blue chip stocks. We’re gonna look at the 30 stocks on the Dow Jones Industrial Average. So why would you invest in a blue chip stock? Well there’s a number of reasons to do this. First of all, the dividends allow for compound interest. So when you take those dividends and you reinvest it in the stock, then those dividends will allow you to earn dividends in the future, which is essentially compound interest at that point. So you’re earning dividends on dividends, very similar to earning interest on interest. Second of all, there’s lower risk due to the track record. So because these are large companies that are well established, they’re dependable, they have a track record of success and a track record of dependable earnings, they are lower risk because they are very well managed and they’re very well run, and you’re not gonna see these companies typically as the ones that are going bankrupt. We’re gonna talk about some that have gone bankrupt in a second, so while it’s not impossible, it’s far less likely than looking at maybe a growth stock or a mid cap stock as far as looking at a stock that may go bankrupt or be irresponsible with their money. Historically they have been great longterm investments. And another thing that I like about blue chip stocks is the fact that most investors are longterm investors, so there’s a lot less volatility. So if we do see a market correction, usually the blue chip stocks will hold their value more because less people are going to be selling out of fear. Usually the people investing in blue chip stocks are more intelligent investors who know what they’re doing so they’re in it for the long term and when they buy a stock like let’s say AT&T, Verizon, something like that, when they’re buying a stock like that they’re not gonna be holding that stock for two weeks and then selling it and then buying it back. They’re probably investing for that stock for five to 10 years or more. And they understand things like market corrections and bear markets, and they’re not gonna be the ones to sell out of panic. So usually the people holding blue chip stocks are longterm investors. The other thing is you get a cash payment from your investment. So some people like to invest in dividend stocks and then actually take that cash payment, and some people even live off that cash payment. So they have enough money invested that they can live off of their dividends. So that’s one way people do it. The advantage is being paid in two ways, so you can also be paid by an increase in the share price as well as getting dividends. So that is why people like dividend stocks as well because you’re paid in two different ways. The other thing this allows you to do is this allows you to hedge against loss. So let’s say your stock goes down in value but you actually had dividends that exceeded how much you lost, so at that point you’re able to hedge against your loss. So if your stock went down 3% in value but you made a 4% dividend yield, you’re actually up 1% on that investment because your dividends protected against that loss. The other reason is that many flee to them in times of uncertainty. So when there is market uncertainty, many people flee to these giants and to these blue chip stocks because they’re known for being basically recession-proof, but they’re not completely recession-proof. I would say they are recession-resistant would be a good word, they’re more resistant to bad economic conditions due to their track record, but they are by no means invincible. So let’s go over that right now, let’s cover that. So blue chip stocks are not recession-proof. I want to give you guys a couple of examples of gigantic blue chip companies that went under. So just one example here as far as a correction goes, in 1987 the Dow Jones Industrial Average saw its worst correction and it lost 23% in one day. In 2008, shares of Citigroup were less than an ATM fee. So if you went to an ATM and you took out money, you were spending more on that ATM fee than it would cost to acquire a share of Citigroup, that’s how low share prices went of that stock. In 2008, Lehman Brothers went bankrupt as part of the 2008 stock market crash, that was an investment bank. In 2008, General Motors went bankrupt, also a part of that 2008 stock market crash, that was obviously an automotive company. In 2001, another gigantic blue chip company Enron went bankrupt, they were an energy trading company. And as far back as 1987, Texaco, an oil company, went bankrupt. So these are very large companies that, despite being these blue chip stocks, still went bankrupt. So I don’t want you guys to think that it’s impossible that these companies are just invincible. While it is much lower risk, the risk is still there. When we see serious economic decline, there is the possibility for these giants to go under. Alright, so the last thing we’re gonna look at, let’s take a look at some blue chip companies. So like I said, many people use the Dow Jones as a way to look at blue chip stocks, as the 30 companies listed on the Dow Jones. So we’re going to look at the Dow Jones stocks, these are as of January 2017, so I believe this is still current. They don’t usually change companies around that often. But as far as technology companies go, we have IBM, we have Microsoft, Apple, Intel, GE which may not be technology but I was trying to merge these all together and that’s kind of a gray area calling GE a tech stock ’cause they’re involved in so many different things, United Technologies, Cisco, and Verizon. At&T used to be on this list, I’m not sure why they’re not any more. But Verizon and AT&T are two blue chip companies that people love to invest in. Then as far as food companies go we have McDonald’s, we have Coca Cola. I’m sure you know someone who has bought Coke stock for their kids, people love Coca Cola stock, people have been investing in it for years. As far as oil companies go, we have Chevron and Exxon. As far as banking goes we have American Express, Visa, JPMorgan, Goldman Sachs. As far as retail goes we have Walmart, we have Home Depot, and new to this list is Nike. As far as industrials go we have 3M, DuPont. Pharmaceutical companies we have Johnson and Johnson, Merck and Co., and Pfizer. And as far as other companies that didn’t really fit in to one of these categories, there’s Procter and Gamble, Boeing, Caterpillar, Walt Disney, Travelers, and United Health. So these are just examples of gigantic blue chip companies that a lot of people invest in, and companies that pay dividends. If you’re looking for some examples of blue chip stocks, there’s some examples there for you. Or you know, look at other ones as well and keep track of which stocks are on the Dow Jones. Make sure, too, if you’re investing in blue chip stocks you’re diversified across many different sectors. So I wouldn’t say take all of your money and invest in all of these technology stocks, I would pick ones from different sectors, that’s kind of why I broke it down into different sectors and many of these you could break down even further because obviously Verizon is not in the same business as Intel, and Apple is not in the same business as United Technologies. So you can break it down even further. But anyways guys, I just kind of wanted to cover the basics of blue chip stocks. So hopefully you have a better idea of what these are and hopefully you’ll be able to pick some out to invest in, if you’re looking for some blue chip investments. But if you guys enjoyed this video please drop a like, and if you are new to my channel, please consider subscribing to be notified of any future uploads, and as always I thank you guys for taking the time to watch this video.