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Imagine if you were made an offer you couldn't refuse. The offer is as follows:
You will be given $250,000 to invest. You must invest it in a single corporation and leave it invested in that corporation for 30 years. At that point, if the value of the investment has risen to $1 million or more, you can keep it!
If you do a little math, you will find that the investment only has to increase 5% per year to reach that target. You don't have to pick the highest-flying stock you know to have a chance to keep the money. You would be better served selecting a corporation with proven staying power. This serves as our introduction to "blue chip" corporations.
Back in the day, blue was the color of the most valuable poker chip. The name gradually came to signify our most valuable corporations. Blue chip corporations may not stand out in any one regard. They may not be growing as fast as growth companies or paying dividends as high as income companies. Their share prices may not be rising as fast as the latest darling of investors. All they do is use their financial strength, brand recognition and good reputation to grow steadily and dominate their markets.
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Suitable for
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Investors who are conservative, but want retain the opportunity to achieve income (through dividends) and growth (through the share price increasing).
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Examples
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Nike (NKE), Pepsi (PEP), plus many of the 30 members of the Dow Jones Industrial Average (DJIA).
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In the news
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McDonald's Stock Hits Record High on Global Growth - October 21, 2011
Blue Chip America Mints Money to Spend on Growth, Dividends - July 30, 2010.
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Connections
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Blue chip corporations are similar to defensive corporations in that they are the least risky stocks to invest in. In fact, leading defensive corporations can also be considered blue chips.
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Explorations
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The scrap heap of history is littered with blue chips that have fallen from grace. They include: General Motors (GM - bankrupt and only recently reformed using the same stock symbol), General Electric (GE), Citibank (C), Cisco (CSCO), Kodak (EK), and Xerox (XRX). Do historical research on several of these corporations and determine why each has fallen from grace.
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A final word
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After reading our opening offer, you may have been tempted to identify Google or Apple as obvious choices. Keep in mind that Google was formed in 1998. It soon overtook Yahoo in search. Can we say with any confidence another corporation or technology won't come along to take Google's place?
Finally, it would be reasonable to argue that there is no such thing as a blue-chip corporation. The two main reasons are:
- The rate of change of technology is accelerating and that makes it very difficult for corporations which are on top to stay on top.
- Competition and commerce are truly global, meaning that innovation can come from any corner of the globe.
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