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What are Australia’s blue chip shares?
We explain why investing in blue chip stocks can be a good strategy.
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If you're interested in investing in the stock market, you've probably come across the term 'blue chip' stocks. You may be wondering what they are and how you can invest in them.
The term is a little vague, but generally speaking blue chip stocks are major listed companies that have had a good financial track record spanning many years. These kinds of companies tend to be safer and less volatile than other stocks and often pay a dividend.
During a stock market crash, a recession or market volatility, you'll often hear analysts suggest blue chip shares to buy. The reasoning here is that major companies are more likely to weather a storm and hence their impacted share prices are expected to rise again after the crisis ends.
What are blue chip shares?
Some of the typical characteristics of a blue chip company includes:
- Large company
- Good financial track record
- Older companies
- Pays dividends
List of ASX blue chip shares
Source: S&P/ASX20 index
What are Australia's blue chip shares?
There's no official list of 'blue chip' stocks – the closest we have is the list of companies on the S&P/ASX 50 index, a list of Australia's top 50 companies by market capitalisation. It includes companies with a history of providing steady returns and minimal volatility to investors. These companies are spread across a range of market sectors, including:
Banking and financial services
Companies in Australia's financial sector make up a large portion of the top 50 stocks. These companies tend to have a history of providing large dividends and include AMP and the Big Four banks: CommBank, Westpac, ANZ and NAB.
Resources sector
As mining is a cyclical industry, resources companies have the potential to provide high capital growth, at the same time have a reputation for underperforming when the mining industry experiences a downturn. Having said that, companies such as BHP Billiton, Woodside Petroleum and Rio Tinto all feature in the S&P/ASX 50.
Retail sector
Retailers tend to offer medium-sized dividends to shareholders, and Woolworths, Coles and Wesfarmers are popular choices among investors.
Should you invest in blue chips or small caps?
While blue chip stocks tend to be a safer investment, they don't usually rise considerably in value over a short-time frame unless you can scoop them up at a discount during a downturn. This means that blue chips are long-term investments or used to provide an ongoing incoming through dividends.
Those looking to make a quick buck by striking it lucky invest in riskier but smaller companies called 'small-caps'. When you invest in a small company you're betting that it will be the next big thing and turn that pocket money into millions.
It can be tempting to take a punt on speculative companies. These are companies that do not have a long, well-established history of providing stable returns to investors. They’re also typically located outside the list of the top 100 companies in Australia. These are sometimes called 'growth stocks' and the smallest are penny stocks – those that trade at less than $5 per share.
Blue chip stocks vs penny stocks
Blue chip stocks. A blue chip stock is usually an older, well-established company that has a reliable history of weathering against tough times and of growing profits. Examples include: BHP, CBA, Telstra and CSL.Penny stocks. Penny stocks tend to trade for less than $5 and are also called micro-cap stocks or small-cap stocks. The idea is to buy them for a low price with the promise of big profits later. They're generally riskier, speculative stocks.
The benefits of dividends
There are two ways to earn money from shares. Not only can you benefit from capital growth in the value of shares over time, but you can also earn an income from dividends and any additional franking credits. Dividends are more often paid out by blue chip stocks, which is part of what makes them so attractive.
A dividend is a company’s way of distributing its profits to shareholders. Many companies listed on the ASX pay dividends twice a year, including a smaller “interim” dividend and a larger “final” dividend. However, not all companies pay dividends to shareholders, and will instead invest all of their profits back into the company.
Dividends tend to be paid by larger, well-established companies on the ASX and you can use them to provide a regular, ongoing source of income. This offers you security and stability for the future, while at the same time giving you a chance to benefit from the company’s long-term capital growth.
How to buy blue chip shares in Australia
- Choose a share trading platform. If you’re a beginner, our table below can help you choose.
- Open your account. You’ll need your ID, bank details and tax file number (TFN).
- Confirm your payment details. You’ll need to fund your account with a bank transfer, debit card or credit card.
- Find the shares you want to buy. Search the platform and buy your shares. It's that simple.
Compare share trading platforms to buy blue chip stocks
Important: Share trading can be financially risky and the value of your investment can go down as well as up. Standard brokerage is the cost to purchase $1,000 or less of equities without any qualifications or special eligibility. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
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Tips when choosing stocks
Make a plan
- Before you start buying or selling shares, consider exactly what you want to achieve with your share portfolio and in what timeframe. Once you have a plan in place you can then choose your investments accordingly.
Don’t panic
- Share markets fluctuate all the time – look at historical graphs charting the performance of the ASX for proof of this – so don’t panic at the first sign of share prices heading south. Stick to your plan and ride out any dips or down periods.
Consider your investment goals
- Are you looking for shares to provide capital growth or to generate income? Smaller companies tend to focus more on growth and therefore reinvest profits into their business, while larger companies tend to pay dividends to their shareholders.
Don’t forget about dividends
- Dividends can provide a stable source of ongoing income during uncertain financial times. Look at companies with a history of paying high dividends to shareholders to see whether they could provide an attractive investment option for you.
Choose companies wisely
- Blue-chip stocks, also known as large-cap companies, tend to offer secure, stable returns and a minimal level of risk. Smaller companies outside the top 50 or 100 companies on the ASX may provide larger growth potential, but they also come with a much higher level of risk attached.
Research before you buy
- Looking at a company’s annual reports, earnings and historical performance will help you form a clearer picture of whether it is a sound investment. If you’re using an online share trading platform, you may also be able to access research reports and buy or sell recommendations for various companies.
Know what long-term means
- In order to ride out any periods of market volatility and enjoy the maximum returns, you typically need to look at an investment time frame of 7 to 10 years when choosing shares.
Consider other investment options
- Depending on your investment goals and appetite for risk, you may also want to consider other options, such as exchange traded funds (ETFs). ETFs are bought and sold on the ASX just like shares, but they allow you to gain exposure to a share index or other group of underlying assets.
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