Here are some key blue chip investment tips that will help you build a stock portfolio for maximum returns
The best stocks to hold in your portfolio all have one thing in common: They give you reason to believe they might be worth holding on to indefinitely.
Most of these stocks have well established businesses and a history of sales gains, plus rising earnings, if not dividends. To put it more simply: these stocks have a clear business plan that seems to be working.
Here are five blue chip investment tips to consider if you want a chance at the highest returns possible.
True Blue Chips pay off
Learn everything you need to know in 'The Best Blue Chips for Canadian Investors' for FREE from The Successful Investor.
Canadian Blue Chip Stocks: Bank of Nova Scotia Stock, CP Rail Stock, CAE Inc. Stock and more.
Blue chip investment tip #1: There is value in the best blue chip stocks
We feel most investors should hold a substantial portion of their investment portfolios in securities from blue chip companies. 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, compared to alternative investments.
Blue chip stocks we recommend have a history of earnings and, in most cases, dividends. They have established their value over the long term. Like all stocks, they can fluctuate widely and many suffer in a long-term market downturn, but they offer a higher probability of long-term gains.
Blue chip investment tip #2: Look for blue chip companies with hidden assets
Good blue chip investments may have hidden assets in the form of real estate. For instance, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the purchase price remains unchanged on the balance sheet. You have to look closely to spot this hidden value. At times, the hidden value in a company’s real estate can come to exceed the market value of its stock. This hidden value may only become apparent to investors when the company upgrades the use of the real estate. For example, a merchandiser might repurpose a parking lot to build a shopping mall with a residential condo tower on higher floors, and a parking garage down below.
Blue chip investment tip #3: Watch out for unusually high dividend yields in blue chip investing
Be wary of blue chip shares with unusually high dividend yields. Investors should avoid judging a company based solely on its dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price). That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a dividend paying stock’s yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut.
Blue chip investment tip #4: Blue chips will handle market setbacks better than other investments
In a deep or long-lasting market setback, your blue chip stocks will tend to go down, along with everybody else’s. But we think they will go down less and recover sooner. At the same time, note that nobody can put a limit on how deep a market setback will go, nor how long it will last.
Blue chip investment tip #5: Don’t sell your blue chips too early
It’s all too easy to sell a stock that looks like it’s headed for a downturn, only to buy another that is headed for a collapse. For that matter, if you make a habit of selling whenever you feel the market’s risk has gone up, you will wind up selling your best stocks way too early.
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