Blue Chips- what does it mean?

There’s actually no hard or fast definition of a blue chip, however it’s a term applied not only to shares...

What type of shares should form the core of your portfolio?

Apart from the obvious answer being, shares that pay good dividends and provide decent capital growth, most investors would want to hold at least some blue chips, because they’re the sort of shares that do just this, and aren’t likely to go wrong, right?

Well, to answer that, let’s look firstly at what blue chips might be.

There’s actually no hard or fast definition of a blue chip, however it’s a term applied not only to shares but to almost anything, particularly to financial products, implying quality, substance, safety, respectability, reliability and generally, though not always, significant price.

Reputedly, the term ‘blue chip’ was coined on Wall St in the early 1920s by a Dow Jones reporter, Oliver Gingold, who applied it to some shares trading at $US200 plus. He was thinking of blue-coloured poker gambling chips, at the time the most valuable ones in the game.

It’s fair to say all shares comprising the S&P/ASX 20 would be generally considered blue chips. This includes Commonwealth Bank, BHP Billiton and Woolworths. It’s probably also fair to say most people would consider all shares in the S&P/ASX 50 as blue chips too. But would all shares comprising the S&P/ASX 100 fit the bill? – probably not.

Marketeers love bandying around the blue chip label – it’s good for drumming up business, but do all blue chips do well? Look at Telstra, usually considered a blue chip. Its share price has fluctuated from $9.20 post-float to $2.55 in November 2010 to $5.08 as at early April 2014. Nothing spectacular there, but the dividends at least have been consistently good – currently 5.65% fully franked. Then there’s Qantas, seemingly one of the bluest of blue chips, now struggling to stay airborne.

The fact is, blue chips face many of the same challenges as any other listed company, and sheer size and long establishment is no guarantee of ongoing good performance and returns.

Financial planner John Ellison, MD of Ellison Financial says, “The term blue chip resonates with investors and retirees, and creates an impression you can’t lose. But that’s rubbish, the reality’s otherwise. Blue chips can get knocked around and underperform just like any other share.

 

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