Definition: Leading stocks are shares of large and reputable companies that have a history of growth and may provide greater stability for investors in the long term compared to small-cap or mid-cap stocks.
How do leading stocks work?
The term “leading stocks” is said to have been coined in the 1920s by a Wall Street Journal reporter named Oliver Gingold, who compared large and reputable companies to the color of the more expensive chips used in casinos during that time.
Investors may use the terms leading stocks or leading companies interchangeably. These companies are typically characterized by financial stability, consistent growth over several years, reliable earnings, and a history of dividend distribution.
There is no official list of leading stocks, and no authority officially designates which stocks are considered leading. However, there are key common traits for companies that people consider leading stocks, including:
- A strong performance record: Although leading stocks are subject to general market fluctuations, these companies achieve price increases over several years.
- Large and market-leading: Since leading companies consistently perform strongly, they grow to become large companies – typically with a market capitalization reaching billions. They are often among the leaders in their industries.
- Lower levels of volatility: Prices of leading stocks fluctuate with the overall market, but in the long term, they tend to be less volatile than small-cap stocks and other classifications.
- Regular distributions: Many leading companies pay dividends. In fact, it is common for distributions to increase over the years.
Example of leading stocks
Coca-Cola is an example of a leading company whose stock price has significantly and consistently increased for over a century, and it has a strong history of dividend distribution. Coca-Cola has increased its dividend payments for over 58 consecutive years.
Advantages and disadvantages of leading stocks
Advantages
- Reduced market volatility: Leading stocks typically do not experience significant and frequent price changes. This can provide some comfort to investors looking to capitalize on rising stock prices.
- Strong track record: Generally, leading companies are frontrunners in their industry and have been operating for a long time. This gives them a long track record of operations, financial performance, and stock performance that investors can consider before investing.
- Dividends and compounding: Leading companies tend to have a long history of dividend distribution, which can be beneficial in two ways. First, dividends provide an income stream. Second, if you choose to reinvest those dividends, you can accelerate the returns from your investments. For example, according to Coca-Cola, the price of one Coca-Cola share was $40 when it became available in 1919. With reinvested dividends, the value of that one share was approximately $10 million in 2012.
Disadvantages
- Limited significant gains: Because leading companies are already established and their stocks provide minimal volatility, they have less potential for growth or large returns compared to small-cap and mid-cap stocks.
- No guarantee against failure: Just because a company is considered leading does not mean it will be a good investment. There are many leading companies that have lost this status and proved to be unworthy investments. For example, General Electric, one of the original members of the Dow Jones Industrial Average in 1896 and a continuous member since 1907, was removed from the index in 2018 after a long period of unsatisfactory stock performance.
Do you need leading stocks?
Diversification is a sound principle in any long-term investment strategy. Leading stocks can be a strong foundation for an investment portfolio, but most financial advisors recommend diversifying their portfolio across several asset classes, even during retirement. Small-cap and mid-cap stocks may offer more growth opportunities. Additionally, investors may want to hold bonds, cash, or other assets.
Note:
The weight of any asset class, including blue-chip stocks, unnecessarily increases the risk of the overall portfolio.
Blue-chip stock values may decrease or remain flat during a period when small-cap stocks or foreign stocks or bonds are rising.
How to Find Blue-Chip Stocks for Your Portfolio
Investors can purchase blue-chip stocks individually or through a variety of mutual funds. The Dow Jones Industrial Average tracks the price of 30 of the largest blue-chip stocks listed on U.S. stock exchanges.
S&P Dow Jones Indices regularly updates the S&P 500 Dividend Aristocrats index, which measures the performance of S&P 500 companies that have increased their dividends annually for the past 25 years. Many brokers offer Dividend Aristocrat index funds as well as other index funds for blue-chip stocks or exchange-traded funds.
What Do Blue-Chip Stocks Mean for Investors?
Blue-chip stocks are a popular part of investors’ portfolios, regardless of the investor’s age or investment style. Because blue-chip stocks are large, established companies across a wide range of industries, they tend to be less volatile than small-cap stocks. Investors—particularly retirees seeking some income—also appreciate the distributions that blue-chip stocks pay frequently.
You should keep in mind that these stocks fluctuate in value with the rest of the market, and just because they are considered blue-chip stocks doesn’t mean they are immune to failure.
Frequently Asked Questions
What are some examples of blue-chip stocks?
Although there is no specific list or definition for blue-chip stocks, large companies with a history of growth and dividends are often considered blue-chip stocks. The 30 stocks that make up the Dow Jones Industrial Average are typically considered blue-chip stocks. Examples of such companies include Microsoft, Apple, Coca-Cola, Chevron, and Boeing.
Where can you buy blue-chip stocks?
You can invest in blue-chip stocks directly or indirectly. Like any other stock investment, you can buy blue-chip stocks directly using your brokerage account. You can also consider gaining exposure to blue-chip stocks by investing in mutual funds or ETFs that specifically invest in blue-chip stocks. The 30 stocks in the Dow Jones Industrial Average are synonymous with blue-chip stocks, so you can purchase mutual funds or ETFs that track the Dow Jones Industrial Average.
Source: https://www.thebalancemoney.com/what-is-a-blue-chip-stock-356066
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