If you're interested in investing in the stock market, you've probably come across the term "blue chip" stocks.
Blue chips stocks are those for large companies that are well known, are high quality and are often market leaders in their industry.
As a result, blue chip shares are considered to be relatively secure investments and often pay out dividends, making them popular choices with many retail investors and super funds.
There are generally 4 key characteristics that are used to define what counts as a blue chip stock in Australia:
The Australian stock market is dominated by large mining and banking companies and many of these would be classified Australia's blue chip stocks.
This includes the Big Four banks - CBA, NAB, Westpac and ANZ - as well as mining giants like BHP and Fortescue Metals.
The following companies (which make up the 10 largest Australian stocks by market capitalisation) would all be considered blue chip stocks:
This list was last updated on 21 November 2024.
By comparison, the US stock market is dominated by huge financial institutions, retail and tech companies, meaning US blue chip stocks are usually considered to be things like Apple, Microsoft, JP Morgan, Berkshire Hathaway and Coca-Cola.
The S&P/ASX 20 index, which tracks the 20 largest companies on the Australian Securities Exchange (ASX) and is a wider representation of Australia's blue chip stocks.1 You can use the table below to see how the blue chips in the ASX 20 have performed over the last 5 years:
Why invest in blue chip stocks?
Because they represent well-established companies with strong financial track records, blue chip stocks are considered more reliable and less volatile investments compared to the wider stock market.
While they may not offer the same potential for growth as smaller, less-established stocks, this stability is valued by many investors, especially those looking for steady returns over time.
One of the other major attractions of Australian blue chip stocks is that they generally have a history of paying out dividends.
Dividends are semi-regular payments made by companies to shareholders as a way to share the company's profits.
Investors looking to generate income from their portfolio therefore look to so-called dividend stocks, which includes many of Australia's blue chip stocks.
"Dividend stocks provide regular income which can be reinvested to compound growth. They also tend to be more stable than non-dividend stocks, offering lower volatility to your capital during market downturns."
Effectively every stock that could be considered a blue chip in Australia trades on the ASX. This means you'll need an account with a broker or trading platform in order to invest in Australian blue chips. You can follow the steps below to get started:
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There are 3 sectors that dominate the list of Australian blue chip stocks:
Companies in Australia's financial sector make up a large portion of the top 50 stocks on the ASX (and therefore Australia's blue chips). 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.
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.
Retailers tend to offer medium-sized dividends to shareholders, and Woolworths, Coles and Wesfarmers are popular choices among investors.
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.
Penny stocks. Penny stocks tend to trade for less than $5 and are also known as micro-cap stocks or small-cap stocks. The idea is to buy them for a low price with the potential of big profits later. They're generally riskier, speculative stocks.
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