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These investments 'tend to hold up best' and are good for 'when the going gets tough', expert says

"When the going gets tough, blue-chip companies tend to hold up best."

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Stock traders who have been profiting of late from a chaotic bull market — you know, the ones whose tips you might find on TikTok or Reddit's r/wallstreetbets page — may tell you that buying and holding blue-chip stocks is stuff for your grandpa. It's hard to blame them. Investing in companies with proven track records that you expect to grow steadily over time isn't likely to deliver the same video game-like dopamine hit of, say, bidding GameStop stock through the roof and back over the course of a few days.

But investors looking to build long-term wealth should be cognizant of the stock market's history, says Todd Rosenbluth, head of ETF and mutual fund research at investment research firm CFRA. And that means investing in firms that can help your portfolio deliver strong returns through thick and thin. "When the going gets tough, blue-chip companies tend to hold up best," he says. "These are companies that have been around through, in many cases, multiple recessions and stayed around. And they'll be around for the next one, too."

As market-leading companies with long-term track records of growth, these aren't just defensive stocks. "These companies will also participate in gains during an economic recovery," says Rosenbluth. "But they won't all win at the same time, and to the same degree. That's why taking a diversified approach to these stocks makes sense."

Any long-term investor can benefit from holding a chunk of blue-chip stocks. Read on to find out what qualities to look for in these stocks and how to go about adding blue-chip exposure to your portfolio.

What makes a blue-chip stock a blue chip

There's no hard and fast definition for a blue-chip stock, but investors agree that a few qualities generally must be present. Blue-chip companies are large, well-established firms with leading positions in their industries. These businesses typically have long track records of profitability and generate ample cash, which they often return to shareholders in the form of a dividend payment.

Investment professionals differ on the specific financial hurdles they expect companies to clear to attain blue-chip status. For inclusion in the Fidelity Blue Chip Growth mutual fund, for instance, firms must appear poised to win an increasing share of customers in their industry and to boost earnings by at least 10% per year over the long term. Firms included in the portfolio of T. Rowe Price Blue Chip Growth, meanwhile, must sport above-average earnings, sustainably growing profits, and little debt.

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Pretty much everyone agrees on one defining characteristic of a blue-chip stock, though, says Rosenbluth: "These firms tend to be household names." Indeed, both the Fidelity and T. Rowe funds count a familiar cast of characters among their top holdings, including Apple, Amazon, Facebook, and Microsoft.

How to invest in blue chips

If you're thinking, "Wait a sec, I already hold stocks like that," you're probably right, says Amy Arnott, a portfolio strategist at Morningstar. "You're talking about some of the largest and most established stocks in the market," she says. "There's quite a bit of overlap with major market indexes such as the S&P 500. So owning an index fund is one way to get exposure."

And though you're less likely to own a fund that tracks it, the Dow Jones Industrial Average comprises 30 stocks that are considered blue-chip companies by the committee that constructs the index and the investment community at large.

When the going gets tough, blue-chip companies tend to hold up best.
Todd Rosenbluth
Head of ETF and mutual fund research at CFRA

If you don't already own a major chunk of blue chips through an index fund, or if you want to bolster your blue-chip holdings, consider a mutual fund that focuses on blue chips, suggests Arnott. The Fidelity and T. Rowe Price funds "both have solid risk-adjusted returns," she says, and both earn high marks from Morningstar's mutual fund analysts. Both funds sport 10-year returns that clobber the S&P 500, and both come with reasonable expense ratios when it comes to actively managed mutual funds: 0.69% for the T. Rowe fund and 0.79% for Fidelity's offering.

Holding certain types of exchange-traded funds can be a great way to up your exposure to blue chips as well, says Rosenbluth. So-called "high-quality" ETFs screen market indexes based on financial analytics and invest in the companies determined to be the most financially fit. The Invesco S&P 500 Quality ETF, for instance, tracks an index that attempts to isolate the 100 highest-quality companies in the S&P 500 — those with strong profitability, plenty of cash, and robust balance sheets, among other factors. Compared with the plain vanilla S&P 500, steady blue-chippers such as Johnson & Johnson and Procter & Gamble occupy larger portions of the ETF's portfolio.

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The iShares MSCI USA Quality Factor ETF (QUAL) focuses on quality names as well, prioritizing stable, consistent earnings growth. Multinationals such as Nike and Coca-Cola are among the portfolio's headliners. Both the Invesco and iShares portfolios charge expense ratios of 0.15%.

Another way to add to your stack of blue chips: holding baskets of stocks in firms with a long history of increasing their dividends. Such firms have "raised their financial profile" over the years, Rosenbluth says. "It's certainly a sign that they've stood the test of time," he adds.

The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) invests in S&P 500 firms that have hiked their payout for at least 25 consecutive years. Pharmaceutical firm AbbVie, energy giant Exxon Mobil, and insurer Aflac are among top holdings in the portfolio, which comes with an expense ratio of 0.35%.

Stocks in the Vanguard Dividend Appreciation ETF needn't have paid a dividend for quite as long for inclusion. The fund invests in profitable U.S. companies with stable earnings that have boosted their dividend for at least a decade. You'll find Walmart and Visa among the fund's top-five holdings. This ETF comes with a tiny 0.06% expense ratio.

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