Blue Chip Stocks: Tasty Growth and Yummy Dividends

Building a dividend portfolio is one of the most rewarding adventures that you can choose to partake in. Watching as your stocks start to not only grow but pay you dividends can be an exciting way to spend the month.

We recently talked about adding index funds to your dividend portfolio, and I explained why the Total Stock Market Index Fund (VTI) was my favorite one. Next, we talked about high yield products like closed-end funds, real estate investments trusts, and preferred shares. 

But what serves as the meat of our portfolio? If index funds are for growth and high-yield is for income, are there securities that can give us growth and income? Yes, there are, and they are called blue-chip stocks. 

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Blue-chip stocks are the world’s best companies—businesses that have been around for a long time and still are growing and paying dividends. If you invest in these companies for the long run, you stand to benefit from years of compounding interest and dividend growth. 

Some examples of blue-chip stocks are McDonald’s (MCD), Starbucks (SBUX), Walmart (WMT), and Johnson & Johnson (JNJ). Adding these stocks to your portfolio is the final key to unlocking growth and income and allowing you to sleep at night. 

How to find blue-chip stocks. An excellent way to start building your blue-chip portfolio is to google “Blue-Chip Stocks.” Yes, it is that simple—don’t worry, we still have some research (called due diligence) to conduct. 

Your Google results will probably return a list of Dividend Aristocrats, which are companies that have increased dividends for 25 years. Dividend Kings are companies that have raised dividends for 50 straight years. Please google these titles to get a list of current Aristocrats and Kings—as they do change.

Now, we can’t just add every single Blue-Chip stock to our portfolio. I mean, we could, but at that point, we may as well buy the S&P 500 index fund (SPY). We need to get the appropriate blue chips that fit into our dividend portfolio well.

When adding blue-chips, the three things I look for are dividend yield, sector diversification, and what month they pay their dividend. Once I know those things, I can invest in the best companies in the world and watch as my dividends keep increasing over time. 

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Dividend Yield. For blue chips (and all securities), we don’t just look at the highest yield. The higher the yield, the slower the growth, as a soft rule. There are a few exceptions, say Abbvie (ABBV), but for the most part, the rule holds up. 

For me, the sweet spot is between 2-3% dividend yield. This usually gets me some excellent growth and a nice dividend payout. Companies like Procter & Gamble (PG), McDonald’s (MCD), and Johnson & Johnson (JNJ) fit nicely into this category.

You do have some outliers that you will still want to add. Software companies usually grow faster but have a much smaller payout. Microsoft (MFST), Visa (V), and Apple (APPL) are some of the high-growth dividend payers. 

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You have others who have very little growth but pay a high dividend—AT&T (T) and Verizon (VZ) fall into this category. You will want to mix it up and ensure you are getting some of the newer blue-chips and the older companies like Exxon (XOM) to give you huge dividends.

I would say to aim for a combined dividend yield of 2.5% for all of you blue-chips. Remember, you have your high-yield products for huge income payouts; blue-chips are for growth, stability, and compounding dividends. 

Sector Diversification. Each company falls into a different sector on the stock market. The 11 stock sectors are:

1. Energy
2. Materials
3. Industrials
4. Utilities
5. Healthcare
6. Financials
7. Consumer Discretionary
8. Consumer Stables
9. Information Technology
10. Communication Services
11. Real Estate

Each sector has its quirks, and they all tend to ebb and flow throughout different periods. For instance, energy stocks (XOM) were hit extremely hard during March and April 2020. There was an oil crisis at the same time as the pandemic. Oil and natural gas companies hit rock bottom prices and super-high yields during this time. 

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Warren Buffet, probably the greatest investor who has lived, has a great quote. “Be greedy when others are fearful, and fearful when others are greedy.” This means to buy at the lowest prices. Energy had a great discount during these times.

At the same time, work-from-home companies like Microsoft and Apple had huge growth. Computers and services were flying off the online selves early in the pandemic. These sectors were information technology and consumer discretionary. 

It is good to know what sector each of your blue chips fall into and ensure you are not overloading into one industry. As long as you are diversified into a few different categories and know how the sector reacts to interest rates and inflation, you should be okay.

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When they pay dividends. Finally, I like to look at when the companies pay dividends. Remember, I am trying to retire on dividends, so I want high income coming in monthly. I can find a high yield that pays me monthly. 

From there, I can layer on my blue-chip stocks to get a great month of income from high-yield and blue-chips, with the occasional index fund dividend. An excellent place to look for dividend pay dates is Yahoo Finance. You can look at their price chart and sort by dividend pay dates. 

Most blue-chips pay once every quarter. So the rotation for one would be something like January, April, July, and October. You will learn these like the back of your hand, and you will also know what companies pay when. I look forward to my dividend payments more than my work paycheck (maybe).

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For the January string, Altria (MO) and Phillip Morris (PM) are my favorites. For the February string, AT&T and Abbvie (ABBV) are my go-to’s. And for the March string, Johnson & Johnson (JNJ) and McDonald’s (MCD) are my jam. 

Conclusion. Blue chips are vital to a growing, compounding dividend portfolio. People have become ultra-rich over time, investing in blue chips. You will want to get some of the mature companies with high payouts, as well as younger companies. 

Part of the fun is trying to pick the younger businesses that will eventually turn into the most prominent companies. Right now, Ally Bank (ALLY) is one of my favorites for the long term. 

My wife just put together her first dividend portfolio on Cash App. It had an index fund (VTI), a monthly-paying REIT (AGNC), January blue-chip (MO), February blue-chip (T), and March blue-chip (PRU). Yes, building a portfolio is that simple. From there, it is just about adding some diversification. 

I hope you learned something awesome from the article. If you are interested in more on dividends, check out the article “How We Plan to Retire on Dividends (book).” Please follow our Facebook Page to get daily passive income articles. Enjoy and Happy Investing. 

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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.  I have no business relationship with any company whose stock is mentioned in this article.