Seeking Blue Chip Stocks for Your Portfolio? Here Are a Magnificent Seven to Consider. | The Motley Fool (2024)

It's common for investors to have their heads turned by hot stocks -- ones that have perhaps doubled or tripled in value in the past year or two -- or the past month. But many of those stocks may be due for a fall, especially if they've been bid up beyond reason by investor enthusiasm. Some of the companies may not even be profitable yet.

It's smart for each of investor to consider stocking their portfolio with some, if not many, solid blue chip stocks. Blue chip stocks aren't guaranteed to be blockbuster performers, but they're generally less risky than their counterparts, and they've often become blue chips by growing huge over many years.

What's a blue chip stock?

A blue chip stock belongs to a company that has grown to be a leader in its field, that is reliably profitable and with a solid track record of growth. It's common for blue chip stocks to be dividend payers, and dividend growers, as well. (Various studies have found that dividend payers tend to outperform nonpayers.)

According to the folks at Merriam-Webster, a blue chip is "a stock issue of high investment quality that usually pertains to a substantial well-established company and enjoys public confidence in its worth and stability" and "a business or undertaking with an outstanding record or likelihood of profitability."

A magnificent seven blue chip stocks

Here, then, are seven blue chips to consider for your portfolio:

• Berkshire Hathaway: Helmed by Warren Buffett for nearly 60 years, Berkshire's value has grown by an annual average of nearly 20% over that time. It's not likely to grow as fast in the future because of its size, but it remains a very promising long-term investment, owning many companies outright (such as GEICO, Benjamin Moore, and the entire BNSF railroad) and meaningful chunks of other companies (such as Apple, American Express, Coca-Cola, and Bank of America). The stock does not pay a dividend.
• McDonald's: McDonald's is known to all as a titan in the fast-food world, but it's also, more quietly, a real estate titan, owning much of the land beneath its franchisees' feet and charging them rent for it. There's a good chance you can't imagine a future without the golden arches somewhere in it. The stock's dividend was recently yielding 2.3%.
• PepsiCo: PepsiCo is known as a major beverage business, with brands such as Pepsi, Gatorade, Mountain Dew, and SodaStream. It's also a salty-snack business, too, with such brands as Lay's, Doritos, and Cheetos. The company has evolved with the times, diversifying its products and adding in newer categories, such as waters and sparkling waters. The stock's dividend recently yielded 3.1%.
• Pfizer: Pharmaceutical giant Pfizer's stock was recently down 37% from its 52-week high, in part because of slumping demand for COVID-19 vaccines and COVID-19 treatment Paxlovid. But the company has been restructuring, looking to make deals, and developing new products. Pfizer's future looks promising, and with its stock pushed down, its dividend yield has risen to around 6%.
• Costco: Costco has grown into a retailing behemoth, with a recent market value topping $330 billion -- and it has done so while serving not only its shareholders well, but also its customers and employees. The company recently sported 874 warehouse stores, 602 (or 69%) of which are in the United States. The stock's dividend yields under 1%.
• Walt Disney: Disney is another stock to consider. It's another diversified giant, with extensive theme park operations that generate close to $10 billion annually and an entertainment division boasting names such as The Walt Disney Studios, Pixar, Marvel Studios, Lucasfilm, ABC, FX, Hulu, ESPN, and National Geographic, to name a few. The stock's dividend yields under 1%.
• Starbucks: Starbucks has grown into a coffee-and-more giant, with a recent market value topping $100 billion, and a dividend recently yielding 2.4%. It has faced pressures from unions forming at many of its locations and has recently signaled that it may negotiate with them. Its growth prospects remain solid, though, as it adds on to its more than 38,000 stores around the world.

Things to know about blue chip stocks

So should you rush out and snap up shares of these seven companies? Not necessarily. First dig deeper into any that interest you, to see how good a fit each might be for you, and how much confidence you have in each. Know, too, the following things:

• Blue chips are not always bargains. Costco, for example, recently sported a forward price-to-earnings (P/E) ratio of 47, well above its five-year average of 36. Many blue chips are great buys -- but not at any price. Valuation matters, so aim to buy stocks at a good or at least reasonable price.
• Blue chips don't always pay dividends. Berkshire Hathaway, for example, does not -- because Buffett would rather reserve his extra dollars to use in purchasing other companies or stocks. If he or his lieutenants run out of good investing ideas, they may start paying shareholders a dividend.
• Blue chips are not guaranteed to prosper. Many will, but some will not. Think of the grand old companies of yesterday that are no longer with us or are no longer powerhouses -- companies such as Toys R Us, Pan Am, Brooks Brothers, and Sports Authority. Many used to be blue chips. So when you buy a blue chip (or any) company, plan to keep up with its progress.
• They can still be dynamic and fast-growing. Don't let these caveats discourage you. Blue chips can be terrific portfolio holdings and won't even necessarily be slow growers. At this point, for example, it's fair to call Microsoft a blue chip stock, and its stock has averaged annual gains of more than 27% over the past decade.

So as you seek stocks to buy, do consider blue chip stocks. Many of them will continue to grow at respectable clips in the years to come, often while generating regular dividend income for you.