Blue chip dividend stocks are stocks issued by financially sound, internationally recognized companies that pay dividends. These dividends may be more consistent and stable when compared to smaller companies, thanks to the financial reputation of the corporation issuing them. You can find dividend blue chip stocks using a stock screener, comparing dividend yield rates and considering the overall market capitalization of the companies you invest in.
While not all blue-chip companies pay a dividend, those that do offer the financial power of industry-leading corporations. This means that these companies can often keep paying dividends consistently or even increase their dividends over time. Read on to learn more about how you can identify blue-chip companies and add the power of dividends to your portfolio.
Understanding blue-chip dividend stocks
What are blue chip dividend stocks? Before answering this question, it's important to know what distinguishes a blue-chip company from less established competitors.
Blue-chip stocks are shares issued by nationally recognized market leaders. To be considered a blue-chip stock, a company must have a long and consistent history operating within its industry and a solid financial record. The term "blue chip" refers to the game of poker, where players who collect the most blue chips see the highest profit. View a list of blue-chip stocks.
A blue-chip dividend stock is a company that meets the criteria to be considered a blue-chip company and that issues a regular dividend. A dividend is a shared portion of a company's profit distributed to investors. Investors value dividends because stocks that pay dividends can create a simple avenue to generating passive income. Investors may also reinvest these dividends into the stock using their broker's DRIP feature, compounding returns and increasing their dividend distributions.
Do all blue chips pay dividends? Unfortunately, the answer is "no." Many new investors are surprised to learn that major blue-chip stocks like Amazon.com Inc. NASDAQ: AMZN do not pay dividends despite record-breaking profits. It is essential to know what blue chip stocks pay dividends and how to research them.
While the "blue chip dividend stock" classification doesn't describe a strict set of stocks, these stocks share a few significant characteristics.
- Stability and reliability: Blue-chip companies are known for their stability, established market presence and strong financial performance. Companies classified as blue-chip investments usually have a long history on the American stock market, with some options dating back over 100 years. Investors often find relative stability in blue-chip companies during market volatility because their long history proves they can weather periods of uncertainty.
- Large market capitalizations: Blue-chip stocks are typically associated with companies with large market capitalizations. A company's market capitalization is calculated by multiplying the current share price by the number of outstanding shares. Higher market capitalizations indicate that these companies have a strong presence in their industries, making them better suited to survive market downturns.
- Leadership in the industry: Many blue-chip companies are leaders in their industries, often having a competitive advantage that comes with strong brand recognition and a large market share. For example, Apple NASDAQ: AAPL is a blue-chip name in the tech sphere with a loyal fanbase that follows each release.
Blue-chip companies' relatively larger size and revenues often put them in better positions to continue paying consistent dividends. Dividends are percentages of a company's profits paid to shareholders in exchange for holding stock. While few blue-chip companies are required to pay out dividends, many elect to as a way to encourage shareholders to hold their shares and avoid actively trading, which may contribute to price volatility.
Benefits of investing in blue chip dividend stocks
As an investor, incorporating blue-chip dividend stocks can introduce several benefits to your total portfolio, including the following.
- Relative reliability and stability: Blue-chip dividend stocks are usually those of large, well-established companies with a history of price predictability. These companies often have strong balance sheets and a track record of weathering economic downturns, which can provide a solid foundation for an investment portfolio. This stability can be especially true during periods of more market uncertainty.
- Income from dividends: One of the biggest attractions of blue-chip dividend stocks is the regular income they provide through dividends. These companies have a consistent history of distributing a portion of their earnings back to shareholders, and these companies can be in a better position to continue paying in the future due to higher revenues. These regular payments can appeal to income-oriented investors like retirees, who rely on a steady income stream to meet living expenses but cannot take excessive risk when selecting investments.
- Potential for dividend growth: Many blue-chip companies are also Dividend Aristocrats, meaning they have a track record of consistently increasing their dividends over an extended period. This dividend growth has the potential to outpace inflation if corporate revenues are good, providing investors with a hedge against rising living costs.
While blue-chip stocks are often sought for their dividend income, but they also have long-term capital appreciation potential. These companies usually have solid fundamentals and more customer loyalty that may contribute to share price appreciation over the long term. This unique combination of dividend income and capital appreciation can enhance total returns, making blue-chip dividend-paying stocks a viable alternative to investors with multiple risk tolerance levels.
How to find blue-chip dividend stocks
Ready to learn how to invest in blue chip stocks? Use the following steps to begin your research and start investing.
Step 1: Narrow down your search to blue-chip companies.
While many stocks pay dividends, you'll only benefit from investing in blue-chip companies if you begin your search by market cap. MarketBeat offers a complete blue-chip stock list here, but you may also want to explore major companies using a stock screener that screens dividends. If this is your first time investing, you might want to begin your search by checking out companies that you recognize.
Step 2: Filter investments using MarketBeat's tools.
Thorough research and due diligence are essential to responsible stock research — even when you strictly trade in blue-chip, large market capitalization stocks. Different companies operate in different industries, each with its unique risk level and potential for returns. Some screeners you might want to use when researching potential investments include these popular options:
- Market capitalization collections: MarketBeat offers a series of stock lists organizing stocks by their market capitalizations. For blue-chip options, consider starting with this list of trillion-dollar companies and this list of large cap stocks.
- Dividend screener: MarketBeat's dividend screener allows you to filter stocks by dividend yield and other features, helping you locate higher-paying options.
- Dividend increase calendar: Lists like the Dividends Aristocrats and Dividend Kings lists help you identify companies that have increased their dividend payments year after year. A history of dividend increases may indicate that these companies have the revenue to continue paying dividends over time.
MarketBeat also offers a convenient list of blue-chip stock options here for quick review.
Step 3: Sort by dividend yield.
A stock's dividend yield is a percentage measurement that compares a company's dividend distributions to its share price. Dividend yields are displayed as percentages, which tell you what percentage of a stock's current share price the company pays out each year in total annual dividends.
For example, American Express Co. NYSE: AXP is a blue-chip company in the financial services sector. American Express currently pays an annual dividend of $2.08, which gives AXP a dividend yield of 1.20% at the current market price at the time of publication, $173 per share. Consider the dividend yield displayed on each stock's page to understand better what you might expect in returns on your initial investment. Be wary of stocks with dividend yields above 10%, as this may indicate that the company may be unable to continue paying its dividend.
Step 4: View dividend history.
One major benefit of investing in blue-chip companies is that these investments tend to hold value more consistently over time. Before finishing the process of selecting a blue-chip investment, take a look at the company's dividend distribution history.
The best dividend stocks work to keep dividends proportional to the company's changing profits. Ideally, you should invest in blue-chip companies with a long history of increasing annual dividends year after year. This will help you see a stronger return on your investment through continued dividend reinvestment.
Factors to consider when evaluating blue chip stocks
Evaluating larger stocks involves a combination of both technical and fundamental analysis. Some data points you may want to consider as you select your investments include:
- Earnings per share: Earnings per share (EPS) indicates a company's current profitability and is calculated by dividing net income by the number of outstanding shares.
- Price-to-earnings ratio: The price-to-earnings (P/E) ratio compares the stock's current price to its earnings per share. A lower P/E ratio may suggest that the stock is undervalued, but comparing it with industry averages is crucial rather than looking for a general "good" P/E ratio.
- Dividend yield: A stock's dividend yield is a percentage of its current stock price that the share pays back in dividends yearly. While higher dividend yields usually correlate to higher payments, a dividend yield above 10% may indicate that payments are not sustainable for the future.
- Debt-to-equity ratio: The debt-to-equity ratio reflects the proportion of debt used to finance the company's assets. A lower debt-to-equity ratio suggests a lower financial risk, which can be particularly important for long-term investors.
- Payout ratio: The payout ratio shows the percentage of earnings paid out as dividends, and is an important insight into the future consistency of dividends. A sustainable dividend payout ratio doesn't take up too high of a percentage of a company's total earnings.
Ensure you pull the following points above for each stock you're considering. Look at the most recent data and compare it to past data points to see how the company is trending. Be sure to also consider a company's position in the current market environment — you may want to consider investing in companies well-positioned to retain market share thanks to size.
Benefits of investing in blue chip dividend stocks
As an investor, incorporating blue-chip dividend stocks can introduce several benefits to your total portfolio, including the following:
- Relative reliability and stability: Blue-chip dividend stocks are usually those of large, well-established companies with a history of price predictability. These companies often have strong balance sheets and a track record of weathering economic downturns, which can provide a solid foundation for an investment portfolio. This stability can be especially true during periods of more market uncertainty.
- Income from dividends: One of the biggest attractions of blue-chip dividend stocks is the regular income they provide through dividends. These companies have a consistent history of distributing a portion of their earnings back to shareholders, and these companies can be in a better position to continue paying in the future due to higher revenues. These regular payments can appeal to income-oriented investors like retirees, who rely on a steady income stream to meet living expenses but cannot take excessive risk when selecting investments.
- Potential for dividend growth: Many blue-chip companies are also Dividend Aristocrats, meaning they have a track record of consistently increasing their dividends over an extended period. This dividend growth has the potential to outpace inflation if corporate revenues are good, providing investors with a hedge against rising living costs.
Blue-chip stocks are often sought for their dividend income but they also have long-term capital appreciation potential. These companies usually have solid fundamentals and more customer loyalty that may contribute to share price appreciation over the long term. This unique combination of dividend income and capital appreciation can enhance total returns, making blue-chip dividend-paying stocks a viable alternative to investors with multiple risk tolerance levels.
Build passive income through blue-chip investments
While many blue-chip stocks show long histories of stable prices, this does not mean they are immune from loss. Even long-term investors should be aware of the risks of investing in individual companies, diversifying their holdings to avoid sudden sharp losses. Additional ways to diversify include supplementing your blue-chip investments with value stocks and major index funds. As is always the case with investing, never put more money into a potentially passive income stream than you can comfortably afford to lose.
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