Definition
A blue chip stock represents ownership in a well-established, financially sound company that is known for its reliable earnings and stable growth. These companies are typically large, nationally recognized businesses that have a track record of consistent performance, steady dividend payments, and strong brand reputation. The term “blue chip” is borrowed from poker, where blue chips hold the highest value. Blue chip stocks are considered less risky compared to other equities because of their stable performance, even in volatile markets. Blue chip companies are usually large-cap, meaning they have a high market capitalization and are among the leaders in their industries.
Case Study
Microsoft Corporation is considered a classic blue chip stock due to its consistent earnings, leadership in the technology industry, and reliable dividend payments. Despite being in the tech sector, which is generally more volatile, Microsoft has demonstrated steady earnings growth and resilience over time.
Microsoft began paying dividends in 2003 and has consistently increased its dividend payments since then. Microsoft’s significant presence in cloud computing through Azure, as well as its leadership in productivity software, gaming, and other services, has ensured steady growth. Its market capitalization exceeded $2 trillion in 2021, making it one of the most valuable companies in the world. During the COVID-19 pandemic, while many companies struggled, Microsoft demonstrated resilience by maintaining strong earnings and continuing its dividend payments, proving itself as a reliable blue chip investment.
Historical Reference
The term “blue chip” was coined by Oliver Gingold, a Dow Jones employee, who used it to describe high-priced stocks of well-established companies. The name came from blue poker chips, which have the highest value.
During the Great Depression, many investors sought safety in stocks of companies with strong fundamentals that were able to survive the economic downturn. Companies like General Electric, AT&T, and Procter & Gamble emerged as blue chip stocks because of their stability and ability to continue paying dividends even during economic struggles.