If you are looking to build wealth over the long term through the stock market, both blue chip stocks and growth stocks have advantages worth considering. In fact, young investors' diversified portfolios often include both types of stocks. Blue chip stocks include many of the most prominent companies in the country. Investment professionals and others may disagree on a narrow definition of growth stocks, but generally growth stocks are those with a recent history of strong earnings and potential for robust growth in their stock prices.
Size and Sector
Blue chip stocks are either among the largest in their respective industries, such as Eli Lilly, the pharmaceutical company, or Bank of America, or they are conglomerates, such as General Electric, which have businesses in multiple industries. Growth stocks have not yet climbed to the top of their industries and instead aspire to rise to a blue chip's size. In recent years, growth stocks often have emerged from the rapidly evolving technology sector. Blue chips' size gives them an advantage of stability, while the smaller growth stocks' companies typically have the advantage of being more flexible.
Dividend
One major difference between blue chips and growth stocks is their use of the dividend, which is a payment companies make to shareholders from their profits. Blue chip stocks customarily provide regular dividends, and those dividends see steady growth over time. Growth stocks do not typically provide dividends to investors. The reason is that these companies are built to grow aggressively, so they keep the profits that they generate and reinvest them in their business rather than pass them along to investors. Shareholders in growth stocks choose to accept the lack of dividends as a trade-off for the expected gain that the growth in share price will provide them as the company strengthens.
Growth
Both blue chip stocks and growth stocks have expectations of growth, but growth stocks' ambitions for an increasing stock price are more aggressive than the blue chips. The reason is that growth stocks simply have more room to grow. Blue chip companies have grown to such a large size that significant growth in earnings is difficult to achieve. Steady growth is a more reasonable goal. Growth stocks, on the other hand, tend to be companies with room to expand within their sector and to see marked increases in earnings.
Stature and Risk
Blue chips' long histories give them a particular status among stocks. For instance, the widely watched Dow Jones Industrial Average, a measuring stick used to gauge the progress of the New York Stock Exchange, consists of 30 blue chip stocks. The age of blue chip companies demonstrates a capability to survive and thrive over the long term, providing you with comfort that they are a reliable investment. Growth stocks, which do not yet have that stability and history, represent more of a risk, though with a trade-off of possibly greater rewards via a fast-climbing share price.
References
- Forbes: 10 Century-Old Blue Chip Stocks Still Earning Their Keep
- USA Today: Definition of "Growth Stock" Can Be Hard to Pin Down
- "Making the Most of Your Money"; Jane Bryant Quinn; 2009
Writer Bio
Tom Gresham is a freelance writer and public relations specialist who has been writing professionally since 1999. His articles have appeared in "The Washington Post," "Virginia Magazine," "Vermont Magazine," "Adirondack Life" and the "Southern Arts Journal," among other publications. He graduated from the University of Virginia.