“Blue chip stock” is a colloquial term for shares in huge and well-established publicly traded companies, such as Coca-Cola Co. (KO), Disney (DIS), Johnson & Johnson (JNJ), and Nike (NKE). There is no exact definition of which requirements a corporation must fulfil to be considered blue chip, so opinions can vary. Generally speaking, “blue chip” denotes that a corporation is publicly traded, huge, well-established, and financially stable. It should have operated for many years and show dependable earnings. Many, but not all, blue chip companies have a long-established tradition of regular dividend payments to shareholders. If you look at a list of what experienced traders consider blue chip companies, you will find mostly corporations that are among the most successful in their industry and have a market capitalization in the billions (USD).
Investors tend to seek out blue-chip stocks when they want to add more stability (and possibly dividends) to their portfolios. However, as an investor, it is important to remember that a company is not invincible just because it is considered blue chip. There are plenty of examples from the history of well-established and well-capitalized companies that went bankrupt or lost a substantial part of their stock value. As an example, General Motors and Lehman Brothers were both very well-established companies before they crumbled.
Why is it called blue chip?
According to Wall Street investor´s lore, the term was coined by the Dow Jones employee Oliver Gingold in 1923. He used it for especially high-priced stocks (regardless of company history), more specifically stocks trading above $200. Back then, a typical poker chip set in the U.S. would consist of blue, white and red chips, and the blue ones would be the most valuable.
Today, a stock company can be trading for much less than $200 and still be considered blue chip. Also, a company will not be considered blue chip just because the share price suddenly rocketed to $200+, since blue chip is associated with having withstood the test of time.
Let´s for instance take a look at the companies used as examples above. At the time of writing, KO is trading below $60, DIS is just under $95, and NKE is at $107. Only JNJ is even close to $200, currently trading at $169.
Blue chip funds
If you want to invest in blue chip companies, you can either do it directly or invest in a blue chip fund. Make sure you know how the fund defines blue chip, since there is no universal definition.
One example is the T. Rowe Price Blue Chip Growth Fund, that focuses in large-cap and mid-cap companies that are well-established and their respective industries. If we look at historical data, the median market cap of the fund´s holdings have been around $100 billion.
Buying into one or more funds instead of purchasing company shares can make it easier to diversify and spread risk for a small-scale investor.
Both blue chip mutual funds and blue chip exchange-traded funds (ETFs) are available.
What Are Dogs of the Dow?
The Dogs of the Dow is an investment strategy designed to, hopefully, perform better than the Dow Jones Industrial Average (DIJA). The basic concept is to invest in the 10 highest dividend-yielding, blue-chip stock companies found among the 30 companies that are included in the DIJA. If you follow the basic Dogs of the Dow strategy, you will rebalance the portfolio at the start of each calender year.
The Dogs of the Dow strategy rose to prominence in the early 1990s. Similar strategies had existed before this, but the term Dogs of the Dow was coined in Michae B. O´Higgin´s book “Beating the Dow”.
The Dogs of the Dow trading strategy rely on the assumption that blue chip companies will not alter their dividend payments to reflect trading conditions. According to this logic, a company where the dividend payment is high in relation to the share price is close to the bottom of their business cycle, and their share price is likely to increase faster than a company that is paying a low dividend in relation to the share price. Therefore, the investor should reinvest in high-dividend-yielding companies annually in order to outperform the DIJA.
Has it worked well in the past?
The answer to that depends on how large a time frame we look at.
During the financial crisis of 2008, the Dogs of the Dow experienced greater losses than the DIJA. In the decade that followed, Dogs of the Dow outperformed the DIJA.
Example: An investor who invested $10,000 in DIJA at the start of 2008 would have $17,350 at the end of 2018. An investor who invested $10,000 at the start of 2008 and followed the Dogs of the Dow strategy would have $21,420 at the end of 2018.
Dogs of the Dow for 2022
Data from December 31, 2021