Blue Chip Stocks

Blue chip stocks are big, well-established, dividend-paying corporations with strong business prospects. These are companies that also have sound management that should be able to  make the right moves to keep competing successfully in a changing marketplace.

The root of the term “blue chip” stems from the game of poker, as the blue chips represent the highest value. Investing in blue chip stocks can give you an additional measure of safety in today’s turbulent markets.

Pat McKeough believes investors will profit most, and with the least amount of risk, by putting the bulk of your stock portfolio in shares of blue chip companies—those that are well-established, with strong balance sheets and steady earnings and cash flow. These are companies that have bright prospects in healthy and growing industries.

The best blue chips offer both capital gains growth potential and regular dividend income. The dividend yield is certainly one of the most concrete indicators of a sound investment. It is the percentage you get when you divide the current yearly dividend payment by the share or unit price of the investment. It’s an indicator we pay especially close attention to when we select stocks to recommend in our investment newsletters.

We feel most investors should hold the largest part of their investment portfolios in securities from blue chip companies. All these stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above average-growth prospects in expanding markets.

Meanwhile, when investing in any type of stock, at TSI Network we recommend using our three-part Successful Investor strategy:

1-Invest mainly in well-established companies;
2-Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
3-Downplay or avoid stocks in the broker/media limelight.

good companies to invest in

Good companies to invest in share a number of key characteristics

High-quality blue chip companies are good companies to invest in. Blue chip companies are typically defined as firms whose stocks have a national reputation for quality, reliability and the ability to operate profitably in good times and bad. However, the problem is that “reputation” plays a key role in the definition.

Companies that have stood the test of time, and pose less risk to an investor even in the worst of financial times, are blue chip companies. Coca-Cola and Apple are two good examples.

Why blue chip companies are good companies to invest in

You can still look at blue chips as the strongest and most secure stocks on the market. Just be sure you look at the stock’s qualities and not just at the label. That’s because some blue chips only get their reputation through a strong public relations effort or by being in the right industry or business situation at the right time and place.


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When assessing blue chip companies, you need to ask: What are they doing to remain vital? These companies hold strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.

Stocks like these give investors an additional measure of safety in today’s volatile markets. And the best ones offer an attractive combination of low p/e’s (the ratio of a stock’s price to its per- share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.

Characteristics of top blue chip stock companies

Blue chip investments should pay dividends: Review a company’s 5 to 10 year record of paying dividends. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stock picks, you’ll avoid most frauds.

Good blue chips have low debt: It doesn’t matter if you’re investing in blue chip stocks or penny stocks, the company under consideration should have manageable debt. When bad times hit, debt-heavy companies often go broke first.

Blue chip investments should have industry prominence if not dominance: Major companies can influence legislation, industry trends and other business factors to suit themselves.

Good blue chip investments have the freedom to serve (all) shareholders: High-quality stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies. Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.

Good companies to invest in offer stability and more

It’s realistic to assume dividends from blue chip companies will continue to contribute around a third of your total return. In addition:

Dividends can grow. Stock prices rise and fall. Interest on bonds holds steady at best. But dividend paying stocks like to ratchet their dividends upward—hold them steady in a bad year, raise them in a good one. That gives you a hedge against inflation.

Dividends are a sign of investment quality. Some good companies reinvest profit instead of paying dividends. But fraudulent and failing companies are hardly ever dividend paying stocks. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

For a true measure of stability, focus on those companies that have maintained or raised their dividends during the recent recession and stock-market downturn. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.

Tip: Good companies to invest in don’t make themselves appear bigger than they are

Penny stock promoters love to make deals (however tenuous or indirect) with major, household name companies. The link with a major gives them instant credibility, especially with investors who are willing to buy penny stocks.

When penny stock promoters get a deal with a major, they go to great lengths to make it seem bigger than it is.

In fact, when a penny stock shoots up on the news of big-company involvement, and the mineral property/unproven technology/revolutionary software is still in the early stages of development, it’s often a good time to sell.

How have you found good companies to invest in? Please share your experience with us in the comments.

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