What Are Blue Chip Stocks in Australia and Are They Good Investments?
If you’re planning on investing in the Australian stock market, you’ve probably heard of blue-chip stocks. They’re shares of strong and stable companies that have a history of paying investors well. But what are they really? And should you include them in your portfolio? Here’s everything you need to know about blue-chip stocks as well as a list of the top 10 in Australia.
What Are Blue Chip Stocks?
The origin of the term “blue chip” is from poker. In that game blue chips are the best and most valuable ones. Same goes with stocks, blue chip stocks are also the best quality and most valuable in the market. These stocks represent companies that lead in their industries, have strong brand recognition, and are profitable while paying dividends.
- Large Market Capitalisation: A high market cap is something that blue chip companies always have. This is the total value of every single one of their shares. It shows how big and in charge they are in the market world. As of October 2023, the biggest company on the Australian Securities Exchange (ASX) by market cap was Commonwealth Bank of Australia (CBA). They reached a value of over $200 billion.
- Financial Stability: With a strong balance sheet and consistent profits, blue chip companies know how to keep themselves financially healthy. Because they can generate cash flow easily, they don’t get wrapped up with too much debt. From there, it’s easy for them to let their money be used for research and development, innovation, and expansion.
- Dividend Payers: Dividends are usually given to investors as additional shares or just cash. Companies within this category make these payments on a regular basis using part of their earnings. Giving investors passive income isn’t the only thing this does but it also shows them how confident management is in the company’s future. And for those who already own some shares getting dividends gives them assurance that management has their back too. As time goes on these payments tend to increase because blue chip companies grow their earnings while keeping payouts stable.
- Resilience: Economic downturns are when you see these types of companies do really well compared to smaller ones who aren’t as established. Which makes them safer investments during times when the market isn’t looking too hot.. They have loyal customers that keep coming back over and over again, revenue streams thrown all over the place, and competitive advantages that allow them to maintain or even increase their share in such an unstable environment..
Different Types of Blue-Chip Companies In Australia
The presence of blue chip companies in a variety of sectors and industries is a reflection of Australia’s diverse and strong economy. These sectors include:
- Banking and Finance: The “Big Four” banks dominate this sector which are the Commonwealth Bank of Australia (CBA), Westpac Banking Corporation (WBC), Australia, and New Zealand Banking Group (ANZ), and National Australia Bank (NAB). Being among the largest and most profitable companies on the ASX, they offer many financial services to individuals and businesses like deposits, loans, mortgages, credit cards, insurance, wealth management, and investment banking. They also reward shareholders with an average dividend yield of 7%.
- Mining and Energy: Natural resources such as coal, iron ore, gold, copper, natural gas, and oil are rich in this country. This makes it one of the main contributors to Australia’s economic growth. BHP Group (BHP), Rio Tinto (RIO), Fortescue Metals Group (FMG), Woodside Energy Group (WDS), Whitehaven Coal (WHC) are some notable blue-chip companies in this sector. Their involvement includes exploration, extraction production processing, and exportation to global markets. Additionally they give generous dividends with an average yield of over 9%.
- Consumer Staples: The essential goods and services industry is full of companies that sell things people can’t live without. These belong to the essential goods industry. It doesn’t matter what’s happening around us we’ll always need these things hence making it another driver for the growth in our economy. Some recognizable companies in this sector include Woolworths Group (WOW), Coles Group (COL), Wesfarmers (WES), Coca-Cola Amatil (CCL), Treasury Wine Estates (TWE), A2 Milk Company(A2M). All these have three things in common which are high customer satisfaction strong brand loyalty stable cash flows. Shareholders can also expect to be rewarded with a consistent dividend payout having an average yield of over 4%.
Are Blue-Chip Shares A Good Investment?
If you’re looking for steady growth and income, blue-chip shares are the way to go. These kinds of shares offer a number of benefits such as capital appreciation, dividend income, and risk reduction.
- Capital Appreciation: A nice plus is that their value goes up over time. This is because they’re good at expanding market share and growing earnings. Companies who sell blue-chip shares can also use the profits to invest in new opportunities, which boosts growth even further.
- Dividend Income: Investors rely heavily on the dividends these companies pay them. It’s an easy way for them to get some extra cash since they don’t have to do anything to earn it. They can take that extra cash and reinvest it or diversify their portfolio.
- Risk Reduction: Blue-chip shares have lower risk compared to other kinds because they’re less volatile and more resilient against market fluctuations. When an economy goes through a downturn or something like an external shock occurs, having high liquidity makes it easier to buy and sell them on the market without affecting price too much.
What Are The Top 10 Blue Chip Stocks In Australia?
Based on the criteria of market cap, financial stability, dividend yield, and resilience, here are some of the top 10 blue chip stocks in Australia as of October 2023 :
- Commonwealth Bank of Australia (CBA): The Commonwealth Bank of Australia (CBA), known as CBA, stands as the foremost bank and the leading company in Australia when considering market capitalization. Providing a wide array of banking and financial services to individuals and businesses throughout Australia and New Zealand, CBA boasts a market cap exceeding $200 billion and an impressive dividend yield surpassing 7%.
- BHP Group (BHP): BHP Group (BHP), a mining powerhouse, secures its position as the second-largest company by market cap in Australia. Not only does it stand as one of the principal producers of iron ore, copper, coal, oil, and gas worldwide, but it also possesses a market cap exceeding $180 billion and a dividend yield that reaches over 10%..
- Westpac Banking Corporation (WBC): Westpac Banking Corporation (WBC), the runner-up in the banking sector, claims its place as the third-largest company by market cap in Australia. Offering an extensive range of banking and financial services to both individuals and businesses across Australia and New Zealand, WBC commands a market cap surpassing $150 billion alongside an alluring dividend yield exceeding 8%.
- Woolworths Group (WOW): Woolworths Group (WOW), reigning as the most significant supermarket chain in Australia, emerges as the fourth-largest company by market cap within the country. With over 3,000 stores spread throughout Australia and New Zealand under esteemed brands like Woolworths Supermarkets, BWS, Dan Murphy’s, Big W, and Countdown, they also operate online platforms such as Woolworths Online and Everyday Rewards. WOW flaunts a remarkable market cap exceeding $140 billion while maintaining an enticing dividend yield above 3%.
- CSL Limited (CSL): CSL Limited (CSL), holding its ground as the largest biotechnology enterprise in Australia, solidifies its spot as the fifth-largest company based on market capitalization. Recognized for manufacturing plasma-derived products, recombinant products, vaccines, antivenoms, CSL is renowned globally for its contribution to these fields. CSL exhibits an impressive market cap of over $130 billion and a dividend yield exceeding 1%.
- Rio Tinto (RIO): Rio Tinto (RIO), the second-largest mining company in Australia, claims the sixth position when it comes to market capitalization. With its substantial production of iron ore, aluminium, copper, diamonds, and uranium on a global scale, RIO showcases an impressive market cap surpassing $120 billion alongside a captivating dividend yield exceeding 8%.
- Australia and New Zealand Banking Group (ANZ): ANZ securing its place as the third-largest bank and the seventh-largest company by market cap in Australia, offers comprehensive banking and financial services across not only Australia and New Zealand but also Asia, Europe, America, and the Middle East. ANZ boasts an impressive market cap exceeding $110 billion while maintaining a dividend yield above 7%.
- National Australia Bank (NAB): NAB is holding its ground as the fourth-largest bank in Australia, maintains its position as the eighth-largest company by market cap. Providing an extensive range of banking and financial services across Australia, New Zealand, Asia, Europe, America, and Africa, NAB exhibits a market cap surpassing $100 billion alongside a compelling dividend yield above 7%.
- Macquarie Group (MQG): MQG is establishing itself as the premier investment bank in Australia while occupying the ninth spot among the largest companies by market cap. With its diverse range of financial services encompassing asset management, banking, advisory services, capital markets operations commodities trading and securities offerings worldwide. MQG exhibits an impressive market cap exceeding $90 billion while maintaining a dividend yield above 5%.
- Transurban Group (TCL): TCL is proudly recognized as the largest toll road operator in Australia elevates itself to be amongst the top ten largest companies based on market capitalization. Taking charge of urban toll roads across Australia and North America including CityLink in Melbourne Westlink M7 in Sydney Gateway Motorway in Brisbane 495 Express Lanes in Washington D.C., and 407 ETR in Toronto. TCL showcases an awe-inspiring market cap exceeding $80 billion along with a dividend yield surpassing 4%.
Conclusion
The phrase “blue chip stocks” refers to shares from companies that have a reputation for consistency when it comes to giving back to shareholders. There are a few benefits of having them in your portfolio. Some of these include capital appreciation, dividend income, and risk reduction. But there is no such thing as perfection, and this applies here too. Blue chip stocks aren’t the best fit for every investor because of their limited growth potential and high valuation. This decision should be made after taking into account the individual investor’s goals and what they want to achieve in the long term. With the reward also comes great risk, so it’s recommended to diversify your portfolio with other types of dividend stocks.
FAQs
What is the average return on blue chip stocks in Australia?
The average return of blue chip stocks in Australia is sort of like a bag of trail mix. It comes with a bunch of different things and it all depends on what you grab first. Different factors can change the outcome, these include the industry it’s in, how the economy is doing, and performance as a company alone. But they’re usually reliable and stable when it comes to returns over time. On average they’ve been known to yield around 10% to 13% annual return over the long term. Of course this can fluctuate based on conditions and other factors.
Are blue chip stocks a good investment now?
It’s mixed feelings about blue chip stock investments in Australia right now. Stability and dividends associated with them are usually appreciated especially when times are uncertain. However, some experts worry about their valuations being stretched out due to low-interest rates that have gone on for too long. There are others who believe that strong fundamentals from blue chip companies make them good investments especially if you’re a long-term investor who values safety and gain.
How to invest in blue chip stocks Australia?
There’s more than one way to invest in blue chips within Australia. You could buy shares directly through an online trading platform or stockbroker. It’s advisable to do some research so you pick stocks from well-established companies that have a history of stable earnings and dividends. On top of that you could also invest in a managed fund or Exchange Traded Fund (ETF) that tracks a blue chip index which would allow you to get exposure from various ones without having to select them individually.
How risky are blue-chip stocks?
Blue-chip stocks are usually seen as low risk compared to other types due to their track record, earnings stability, and often operations that are diversified alongside their business. However, there is still some risk involved but definitely not as much as others. They can be hit by systemic market risks and risks specific to a company. Their share prices being relatively high can also serve as a barrier for some investors. There’s also the chance of an economic downturn, changes in industry regulations, or unexpected adverse events that impact its performance.
Which is the best blue chip stock?
As of October 2023, Forbes Advisor has indicated that the best blue chips stocks include Apple Inc, Walmart Inc, JP Morgan Chase & Co, Johnson & Johnson, Procter & Gamble Co, AbbVie Inc, Coca-Cola Co, Nike Inc, Honeywell International Inc, and Goldman Sachs Group Inc. It’s important to note that while these companies are US-based they are globally recognized and lots of them operate within Australia as well. Among them Apple Inc has the highest market capitalization and a 27.6% average return over 10 years