In poker, the blue chips are typically the most valuable, but when it comes to investing does this still ring true? What are blue chip stocks and how can you buy them?
What are blue chip stocks?
Blue Chip stocks refer to stocks from companies that are highly reputable, and traditionally have long records of paying stable or rising dividends.
Some other factors that may qualify a stock as a blue chip include being a constituent in a major stock index eg. The DOW Index or S&P 500, the company itself being an industry leader in their respective field, and typically being a long-running, financially sound and generally well-established corporation.
A great example of blue chip stocks in the US would be FAANG stocks – Facebook (now known as Meta), Apple, Amazon, Netflix and Google (also known as Alphabet). For the most part, these tech giants have regularly grown year on year and in many ways dominate the stock market in the US.
What are Australia’s Blue Chip Stocks?
While Australia doesn’t have an acronym equivalent to FAANGs that carries the same prestige and glamour to the modern consumer, several Australian corporations have a long and successful history. This includes not just Australian investors, but globally.
Perhaps the best place to begin identifying Australia’s blue chip stocks is with the S&P/ASX20 Index. While there are several household names on the S&P/ASX20, many may not be familiar. At present, the top 20 are comprised predominantly of Financials (44%), followed by Materials (17%) and Health Care (12%).
So, just who are the major players? Here are the top 10 ASX companies by market cap:
- BHP Group Ltd (ASX: BHP)
- Commonwealth Bank of Australia (ASX:CBA)
- CSL Ltd (ASX: CSL)
- National Australia Bank Ltd (ASX:NAB)
- Westpac Banking Corporation (ASX: WBC)
- Macquarie Group Ltd (ASX: MQG)
- Australia and New Zealand Banking Group Ltd (ASX: ANZ)
- Woodside Energy Group Ltd (ASX:WDS)
- Fortescue Metals Group Ltd (ASX:FMG)
- Wesfarmers Ltd (ASX: WES)
The full list of the S&P/ASX20 can be found here.
What blue chip stocks are in the material sector?
Key players in the Materials sector are Rio Tinto, Fortescue Metals Group and BHP Group. All operate within the mining industry, with locations globally. While Fortescue Metals and BHP are headquartered in Australia, Rio Tinto’s head offices are in London. Though these corporations still hold prime spots in the ASX20, BHP’s Vice President of Market Analysis & Economics has gone on the record saying,
“…oil and copper prices are highly susceptible to swings in global policy uncertainty. We consider the commodity-specific fundamentals of both oil and copper markets to be sound… Looking beyond the immediate picture, in the medium–term, we see the need for additional supply, both new and replacement, to be induced across most of the sectors in which we operate.”
These companies remain highly reputable within the investor space, but it is important to remember nothing is ever certain in the stock market. Also, for those interested in ethical investing, these stocks may not feature highly on your ‘to buy’ list.
What blue chip stocks are in the financial sector?
The largest piece of the S&P/ASX20 pie is taken up by Financials, with the usual suspects and heavy hitters like Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank Limited (NAB) and Westpac (WBC) among the top.
At the time of writing, all of the Big Four banks have recovered from their COVID-19 lows. CBA, in particular, has gained more than 70% since their COVID-19 low. And most of the Big Four banks are currently on an upward trajectory after the most recent market slump in June of this year. In some other good news for the banks, if the office cash rate continues to rise, which is looking likely, this could bode well for the banking sectors profits.
What blue chip stocks are in the Health Care sector?
Not many health care corporations sit amongst the ASX20, but the CSL group – otherwise known as the Commonwealth Serum Laboratories – have a market cap large enough to ensure Health Care is still a primary sector in the top 20. CSL is a manufacturer of biotechnology, researching as well as producing medicines that treat a variety of medical conditions. Historically, CSL has been key in introducing medicines like penicillin to Australia, as well as vaccines against influenza and polio.
In 2020, the COVID-19 pandemic took hold of the world and all eyes were on the health care sector and for a vaccine to be formulated. So it is no surprise that CSL’s share price didn’t suffer too much during the height of the pandemic. CLS shares are available to purchase on, you guessed it, the Australian Securities Exchange.
Other blue chip stocks on the ASX
Other notable companies on the ASX20 include property group Goodman, which sits in the Real Estate sector. Goodman is responsible for developing and managing industrial real estate, and own several such properties globally.
Grocery giant, Woolworths (WOW), also holds a place in the ASX20. WOW’s share price has fully recovered from their COVID-19 low, at the time of writing it has gained 35%, despite the most recent market slump.
How to buy blue chip shares in Australia
If you’re interested in purchasing any of these Australian blue chip shares, you can buy them individually through a broker or an online share trading platform. Alternatively, you can invest in an Exchange Traded Fund, or ETF, like the iShares S&P/ASX20 ETF or Vanguard MSCI Australian Large Companies Index ETF. ETFs are available through many providers in Australia.
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Pros and cons of investing in blue chip stocks
There are a number of advantages with investing in blue chip stocks, they tend to:
- be less volatile and often less risky than other stocks
- be dividend-paying stocks
- offer steady returns
- be well regulated and governed
Some of the disadvantages of investing in blue chip stocks are:
- there is less potential for growth as they are already well established
- returns tend to be lower than other stocks
- poor dividend yield
Dividends stocks vs. growth stocks?
One of the defining features of a blue chip stocks is their ability to pay dividends consistently. So, when deciding if investing in blue chip stocks are right for you; you often have to consider whether dividends are right for you. Often companies that pay dividends are not re-investing their profits into the company to expand or innovate, which could see less growth. However, on the other hand, dividend stocks are ideal if you are looking to create an income stream from your investments.
Should you invest in blue chip shares?
Blue chip stocks may have weathered multiple market cycles and other industrial and economical challenges, but there is still no guarantee of a 100% safe investment. Looking back just over a decade, a recession in 2008, coupled with the automotive industry crisis, saw US company General Motors file for bankruptcy in 2009. Even with companies the general public would consider highly reputable, there are still risks involved. Take into account your personal circ*mstances and when in doubt, seek the help of a professional financial adviser.
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As a seasoned financial expert with a deep understanding of investment strategies and market dynamics, I can provide valuable insights into the concepts mentioned in the article.
Blue chip stocks are indeed considered the most valuable in poker, and this analogy extends to the investment world. Blue chip stocks refer to shares from companies with a solid reputation, typically characterized by a long history of stable or rising dividends. These companies are often industry leaders, constituents of major stock indices such as the DOW Index or S&P 500, and are financially sound and well-established.
In the US, notable examples of blue chip stocks are the FAANG stocks: Facebook (now Meta), Apple, Amazon, Netflix, and Google (Alphabet). These tech giants have consistently shown year-on-year growth and have a significant impact on the US stock market.
Australia's blue chip stocks can be identified using the S&P/ASX20 Index, with top companies such as BHP Group, Commonwealth Bank of Australia, CSL Ltd, National Australia Bank, and others. The composition of the S&P/ASX20 is dominated by Financials, Materials, and Health Care sectors.
Key players in the Materials sector in Australia include Rio Tinto, Fortescue Metals Group, and BHP Group, all operating globally within the mining industry. In the Financial sector, major companies like Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), and Westpac (WBC) are prominent blue chip stocks.
The Health Care sector includes CSL Ltd, known for its biotechnology and pharmaceuticals. CSL has played a crucial role in producing medicines and vaccines, especially during events like the COVID-19 pandemic.
Other notable blue chip companies in Australia include Goodman in the Real Estate sector, known for developing and managing industrial real estate, and Woolworths in the Consumer Staples sector, a grocery giant.
Investors can buy blue chip stocks individually through brokers or online share trading platforms. Alternatively, they can invest in Exchange Traded Funds (ETFs) like iShares S&P/ASX20 ETF or Vanguard MSCI Australian Large Companies Index ETF.
Advantages of investing in blue chip stocks include lower volatility, steady returns, and being well-regulated. However, potential downsides include limited growth compared to other stocks and lower dividend yield.
The article also highlights the importance of considering whether dividend stocks or growth stocks align with an investor's goals. While blue chip stocks are known for consistent dividends, they may not offer the same growth potential as some other stocks.
Ultimately, the decision to invest in blue chip shares should be made considering individual circ*mstances, risk tolerance, and financial goals. It's crucial to acknowledge that even seemingly reputable companies can face risks, as demonstrated by the 2008 recession and the bankruptcy of General Motors in 2009. Seeking professional financial advice is recommended when in doubt.
In summary, blue chip stocks have their merits and drawbacks, and careful consideration is essential when making investment decisions.
