The legend goes that blue chip stocks are so named for the highest value chips used in the game of poker. It’s a fitting description. There is not a formal list constituting an official definition of blue chip stocks, though they are generally thought of as being represented by the 30 stocks found in the Dow Jones Industrial Average (DJIA). These are the equity shares of the highest quality companies in America.
Blue chip stocks are giant companies with solid reputations. Think of General Electric, Intel, Visa, Wal-Mart and Walt Disney — financially fit corporations with dependable earnings, usually paying additional income to investors in the form of dividends.
Blue chip stocks in tough times
Blue chip stocks are the best-of-the-best. But they aren’t crash proof. These heavyweights took a beating in 1973-74. Let’s consider their performance during the most severe market setbacks of the past 100 years.
The greatest stock market crash of the 20th century wasn’t in 1929; it was in 1987 when the Dow Jones Industrial index lost almost 23% in one day. That’s the worst day’s performance in market history.
Examine the track record of some nearly century-old blue chip stocks during these crashes: AT&T, General Electric and E.I. DuPont.
During the ’29 crash, AT&T lost 12.7%. In ’87, it fell over 21%. GE took a 15.9% loss in ’29, but a 17.4% hit in ’87. And DuPont saw its stock lose 15.5% in ’29, but an 18.2% loss in ’87.
It took two years for blue chips to recover, but recover they did.
Blue chip stocks and dividends
The best of the blue chip stocks have a long history of paying dividends. In legendary investor Ben Graham’s book “The Intelligent Investor,” he says the conservative investor should look for a company that has been paying dividends for 20 years or more. That’s a very long time and a stringent standard, but it gives you some idea of just how regal blue chip stocks can be. That standard of long dividend payment applies to companies like 3M, Johnson and Johnson, and Chevron.
Just as the Dow Jones Industrial Average index continues to change, so does the accompanying “list” of blue chip stocks. The Dow has no set, publicly issued parameters for how stocks are added or removed from the DJIA. The “Averages Committee” merely states that a stock is typically added only if a company has an “excellent reputation, demonstrates sustained growth and is of interest to a large number of investors.”
The Committee says changes to the index are rare and usually occur only when a company is acquired or makes a significant change to its core business.
To track blue chip stocks, keep a close eye on the DJIA and be aware whenever changes are made.
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Just like Warren Buffett, you need to follow these three key investing principles to make the most of the incredible opportunities out there.