Blue Chip

A blue chip is a large, well-established company with a history of profitability - on the ASX, the twenty largest names: the big four banks, CSL, BHP, Woolworths, Wesfarmers and their peers. The term comes from poker, where blue chips carry the highest value, and the label implies quality and stability. Blue chips are typically the dividend payers of the index, with fully franked income that makes them the core of Australian income portfolios.

The label implies more safety than the balance sheet delivers. Blue chips fell as hard as the index in the GFC, the banks cut or deferred dividends in 2020, and the sector concentration inside the ASX 20 is the portfolio risk the label hides - financials and materials together dominate the top of the index. The diversification entry covers the concentration arithmetic, and the dividend entry covers the income the label rests on. Quality is real; safety is a different claim.

Walk the composition. The ASX 20 is dominated by financials - the four major banks alone are roughly a fifth of the index by weight - alongside materials, healthcare and the retailers. These are the companies with the largest market capitalisations, the longest profit histories and the deepest dividend records. The franking flows through: the companies pay 30 percent tax, and the dividends carry credits that the franking credits entry covers from the shareholder's side.

The income arithmetic is the second mechanism. A big-four bank paying a $1.70 fully franked dividend on a $40 share delivers a 4.25 percent cash yield and a 6.07 percent grossed-up yield - the income engine that makes blue chips the core of retiree portfolios. The yields move with the price, and the dividend yield entry covers the denominator. The income is real; the label around it is not regulated.

The concentration is the third mechanism, and the one the label hides. Holding the ASX 20 directly is a concentrated bet: the four banks move with the same housing market, the miners move with the same commodity cycle, and the healthcare weight is largely one company - CSL. A 2020-style shock that hits banks hits a fifth of the index at once, which is why the index fund entry - the whole market, including the small names - is the diversification the blue chip portfolio replaces.

For an Australian reader, blue chips are the default answer to 'which shares', and the default is half right. The quality is real: these are the companies with decades of profits and the franking that funds retiree income. The safety is not: the GFC took the banks down with the index, 2020 cut their dividends, and the concentration inside the ASX 20 is a portfolio bet the label never declares. The portfolio diversification calculator measures the concentration in your own holdings.

A colleague named Brent (yes, that Brent) held 80 percent of his share portfolio in one bank because 'you cannot go wrong with the big four'. The 2020 dividend cut and the drawdown arrived together, and his income fell and his capital fell with it. The label was accurate; the concentration was the decision. The highest-leverage thing most Australians can do is treat blue chips as quality companies rather than a risk classification, and check the concentration with the portfolio diversification calculator before the next pay cycle.