The journey isn’t smooth by any means, with drops of 50% or more lasting several years along the way, but over time, the economic engine that produces the profits exerts its extraordinary power. It shows up in the total return of the shareholder, presuming that shareholder paid a reasonable price. (Even then, that isn’t always a requisite. As history has shown, even if you paid stupidly high prices for the so-called Nifty Fifty, a group of amazing companies that was bid up to the sky, 25 years later, you actually beat the stock market indices despite several of the firms on the list going bankrupt.)
By holding the stock directly, and allowing enormous deferred tax liabilities to build up, the wealthy can die with the individual stocks still in their estate, passing them to their children using something known as the stepped-up basis loophole. Effectively, as long as you are still under the estate tax limits, when this happens, all of the deferred capital gains taxes that would have been owed are forgiven. It’s one of the most incredible, long-standing, traditional benefits available to reward investors. For example, if you and your spouse acquired $500,000 worth of blue chip stocks and held on to them, dying after they had grown in value to $10,000,000, you could arrange your estate in a way that the capital gains that would have been owed on the $9,500,000 unrealized gains ($10,000,000 current value – $500,000 purchase price) are instantly forgiven. You would have never paid them. Your children will never have to pay them. It’s such a big deal that you’re often better compounding at a lower rate with a holding you can maintain for decades than trying to flit in and out from position to position, always chasing after a few extra percentage points.
Another reason blue chip stocks are popular is that they offer somewhat of a relatively safe harbor during economic catastrophes (especially if coupled with gilt-edged bonds and cash reserves). Inexperienced and poorer investors don’t think about this too much because they’re almost always trying to get rich too quickly, shooting for the moon, looking for that one thing that will instantly make them rich. It hardly ever ends well (see examples here and here). Markets will collapse. You will see your holdings drop by substantial amounts no matter what you own. If anyone tells you otherwise, they are either a fool or trying to deceive you. Part of the reason blue chips are relatively safe is that dividend-paying stocks tend to fall less in bear markets due to something known as yield support. Additionally, profitable blue chips sometimes benefit over the long-run from economic trouble as they can buy, or drive out, weakened or bankrupt competitors at attractive prices. As I explained in a long essay on the nature of investing in the oil majors, a company like Exxon Mobil paradoxically sets the stage for much better results decades down the line whenever there is a major oil collapse.
Finally, wealthy and successful investors tend to love blue chip stocks because the stability and strength of the financial statements mean that the passive income is hardly ever in danger, especially if there is broad diversification in the portfolio. If we ever get to the point that America’s premier blue chips are cutting dividends en masse across the board, investors probably have much bigger things to worry about than the stock market. In fact, we’re most likely looking at a civilization-ending-as-we-know-it set of circumstances.
What Are the Names of Some Blue Chip Stocks?
Despite there not being universal agreement about what constitutes a blue chip stock, generally, some names you are going to find on most people’s list, as well as the rosters of white-glove asset management firms, include corporations such as:
- 3M
- American Express
- AT&T
- Berkshire Hathaway
- Boeing
- Chevron
- The Clorox Company
- The Coca-Cola Company
- Colgate-Palmolive
- Diageo
- Exxon Mobil
- General Electric
- The Hershey Company
- Johnson & Johnson
- Kraft Heinz
- McDonald’s Corporation
- Nestle SA
- PepsiCo
- Procter & Gamble
- United Technologies
- Visa
- Wal-Mart Stores
- The Walt Disney Company
- Wells Fargo & Company
From time to time, you’ll find a situation where a former blue chip stock goes bankrupt, such as the demise of Eastman Kodak. However, as surprising as it may sound, even in cases like that, long-term owners can end up making money due to a combination of dividends, spin-offs, and tax credits.
The reality is that if you are reasonably diversified, hold for a long enough period of time, and buy at a price so the normalized earnings yield of the blue chip stocks is reasonable relative to U.S. Treasury bond yield, short of a catastrophic war or outside context event, there has never been a time in American history where you’d have gone broke buying blue chip stocks as a class. Sure, you had periods like 1929-1933, 1973-1974, and 2007-2009; periods during which you watched 1/3 or 1/2 of your wealth disappear right before your eyes in terms of quoted market value. That’s part of the trade-off. Those times will return, again and again. If you hold equities, you will experience that pain. Deal with it. Get over it. If you think it can be avoided, you shouldn’t own stocks. To the true buy-and-hold investor, it doesn’t mean much; a blip on the multi-generational holding chart that will eventually be forgotten. After all, who remembers Coca-Cola losing around 50% of its value due to the sugar crisis shortly after its IPO? Yet, a single share bought for $40, which crashed down to $19, is now worth more than $15,000,000 with dividends reinvested.