What are blue chip shares?
If you're interested in investing in the stock market, you've probably come across the term "blue chip" shares. You may be wondering what they are and how you can invest in them.
Blue chips are stocks that are well known, are high quality and are often market leaders in their industry.
This means they are lower-risk businesses and are often considered safe havens for investors.
Blue chip shares in Australia generally have 4 key characteristics:
- Large company
- Good financial track record
- Older companies
- Pay dividends
In this explainer, we'll show you a list of these stocks with performance the last 5 years, pros and cons of investing and how to buy blue chip shares in Australia.
What are Australia's blue chip shares?
Explore the list of ASX blue chip stocks
Source: S&P/ASX20 index
Our verdict on investing in blue chips
Blue chips as we’ve gone through are larger more established investment options, that will suit a particular style of investor.
Blue chips are strong dividend payers meaning investors who need an income to live off often favour blue chips.
This may make them lower risk and good as a foundation to your portfolio.
For those who want consistent returns a blue chip stock could be ideal for them, assuming they choose the right shares. However, like everything in investing it is risk versus reward. Investors can potentially increase their returns by purchasing small caps or other emerging businesses, but they run the risk of losing their capital.
Pros and cons of blue chip shares
Pros
- Income dependent investors
- Those who want a stable return
- Newer investors who want to buy businesses they know and trust
Cons
- High growth investors
- Those seeking market beating returns
- Investors with a long-time horizon who can take on more risk
Types of blue chip shares in Australia
There is 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, even if they face the usual business risks.
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: Commonwealth Bank, Westpac, ANZ and NAB.
Resources sector
As mining is a cyclical industry, resource companies have the potential to provide high capital growth, and 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 timeframe 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 income 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 adding to your risk, but if you own a small company that turns into the next big thing you could see outsized returns.
On the downside though, you're more likely to see huge volatility. The current market might also favour blue chips. Usually small caps or penny stocks underperform during bear markets. And in a period of rising rates and recession fears, investors might seek the safer havens of blue chips.
Remember 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.
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 or credit card.
- Find the shares you want to buy. Search the platform and buy your shares. It's that simple.
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 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. Look at investment time frames of 7-10 years to ride out any periods of market volatility and enjoy the maximum returns.
- 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).
Compare share trading platforms to buy blue chip stocks
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
