You often hear investors out looking for essential blue-chip stocks, but what does that mean exactly? Blue chip stocks tend to be big, recognizable names. They’re often the first place new investors look because they’re already familiar with their business models. But the best blue chip-stocks are more than just an investment with training wheels. They can be powerful long-term plays that anchor your portfolio for years.
Not all blue-chip stocks are created equally. Some companies that have grown into familiar names aren’t running all that efficiently under the hood. Or they’re stuck in an industry that’s in decline, like tobacco. Instead, blue-chip investors should start by looking for industries that will grow well into the future. Healthcare, tech, and consumer staples are all worth considering.
By nature these companies are recognizable, but essential blue-chip stock picks have a stellar reputation. This is an important factor because, for many blue-chips, their brand power is one of their most valuable assets. It’s what keeps people coming back, and oftentimes what justifies premium prices.
Here are the best blue-chip stocks to consider.
Costco (COST)
Costco (NASDAQ:COST) is a unique play on discount retailers, and it’s impressive business model makes it one of the best blue-chip stock picks. Costco’s known for its enormous warehouses selling discounted goods in bulk. Retail margins are notoriously thin, and Costco is no exception. The group sells a lot of its items nearly at cost. Instead, it depends heavily on membership fees for its income.
It might sound like a risky way to turn a profit, and it would be if Costco didn’t have a base of extremely loyal customers. The company’s 90% renewal rate across the globe means it can count on those fees to continue supporting the business. Notably, the group’s due to increase membership costs at some point this year given the last hike was back in 2017. This has the potential to see some members walk out the door, so management will have to balance off the potential positives and negatives.
Ultimately the Costco membership with its many benefits— from low-cost fuel to discount food— is attractive in any economic climate. But it’s particularly enticing to stretch your dollar further when times are tough.
Pfizer (PFE)
Pfizer (NYSE:PFE) has been hit with some negative sentiment as some of its key drugs are set to see their patents expire over the next 5 years, but it’s still an essential blue-chip stock because of its promising pipeline. Pfizer had an enormous injection of cash thanks it its covid vaccine sales, but with the pandemic behind us, those sales have dried up. Luckily Pfizer used the case to build out its research and development, which has put the group in a strong position to push out new treatments to make up for patent losses.
Pfizer is also worth considering thanks to its shareholder-friendly management style. The group pays out a 4.5% dividend and with a payout ratio of less than 50%, there’s plenty of space to maneuver through tricky times ahead. Worries about the patent issues mean the group’s valuation isn’t too demanding which makes now a good time to consider this essential blue-chip stock.
Visa (V)
The global payments system is a great place to look for essential blue chip stock picks. Cross-border payments and card transactions are the new normal these days, and they will be for some time. So that makes companies like Visa (NYSE:V) worthwhile long-term picks.
Visa makes money by charging back and merchants for processing their transactions. That means the group is able to turn a profit without taking on the risk of lending money itself. This has been a real boon in an age where consumer debt levels are on the rise because Visa’s seen its transaction volumes rise. Notably, if banks are laden with tighter lending restrictions to slow down ballooning consumer debt, Visa would feel the pinch.
Visa’s model is attractive because each new transaction is essentially costless, so added revenue drops straight through to profit. It’s also got strong financials underpinning the investment case— the group’s got plenty of spare cash floating around which has been used for dividends and buybacks in the past.
On the date of publication, Marie Brodbeck held COST. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
