AMERICA’S MARKETS

Question: I’m new to investing and have heard the term “blue chip” used in reference to certain stocks. What exactly is a blue-chip stock?

Answer: Blue-chip stocks are the best of the best in the stock market. They are representative of companies of high quality. Blue chips are favored by investors who want to balance low-risk investing with long-term growth potential and income.

Generally, blue-chip stocks have a long-established history of profitability and growth. Most (but not all) pay dividends, and have done so for many years, often with annual increases. Blue chips are generally among the largest companies in their industry.

Good examples of blue-chip stocks include such companies as Nike, Exxon-Mobil, Johnson & Johnson and Microsoft. All of these businesses are profitable year after year and have excellent track records of stable dividend payments.

Plus, they’re titans of their respective industries.

On the other hand, companies such as Netflix and Tesla generally are not considered blue chips. They are large and wildly popular stocks, but they aren’t the biggest players in their respective industries, nor do they have an established record of profitability. And they don’t pay dividends to shareholders, and most blue-chip investors want income from their investments.

Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NFLX and TSLA.