To identify the best blue chip stocks for beginners, start with our three-part Successful Investor approach

Here’s a top tip on blue chip stocks for beginners: We feel most investors—both new and experienced—should hold the largest part of their investment portfolios in securities from blue chip companies.

If you put 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—you have a great opportunity to profit with the least amount of risk.

Blue chip stocks for beginners: The best blue chips come with a history of success

It’s essential to invest in stocks that have some history of sales, if not profits. Blue chip stocks are generally well-established, dividend-paying corporations with strong business prospects. These are companies that also have strong management that will tend to make the right moves to compete in a changing marketplace.

Blue chip stocks for beginners: The best of these stocks have industry prominence

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

This also includes companies that anticipate advances in their industry, adjust to changing conditions and technology and withstand strong competition. They also have the confidence to pay dividends year after year.

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.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Blue chip stocks for beginners: Top blue chips also offer hidden assets

Good blue chip investments may have hidden assets, for example, in the form of real estate. For instance, when a company buys real estate, the purchase price goes on its balance sheet at the historical value of the asset. Over a period of years or even 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 even 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 stocks for beginners: How you can best profit from blue chips in your portfolio

We advise investors to look for blue chip companies that are likely to pay off if business and the stock market are good, but that won’t hurt them too much during those inevitable periods when business or the markets are bad.

If you follow two of the main pillars of our approach—diversifying across most if not all of the five main economic sectors, and sticking mainly to well-established companies—you will have a better-than-average chance of long-term gains in excess of what you’d get with any other investment approach.

In a deep or long-lasting market setback, your blue chip stocks will tend to go down, of course, along with everybody else’s. But we think they will go down less and recover sooner. But nobody can guarantee that. For that matter, nobody can put a limit on how deep a market setback will go, nor how long it will last.

If a deep or long-lasting market setback does occur, any aggressive stocks you own are likely to fall more than shares of blue chip companies. The eventual recovery of aggressive stocks is also less certain. That’s why we recommend that you hold the bulk of your investment portfolios in securities from blue chip companies.

Bonus tip: Stick to one financial plan that consistently works

A financial plan helps you build up capital over the course of your investing career, and helps you make the most of that capital in retirement.

Our Successful Investor financial plan is the best overall plan we know of.

To make the most of our Successful Investor financial plan, you put yourself on an investing regimen. You start saving as early in your working career as possible. Each year, you set aside a fixed sum to invest. It’s important to continue investing the same sum (or raise it) through good years and bad.

The same sum buys more shares in “bad” years, when prices are low. It buys fewer shares in good years, when prices are high. This cuts your long-term average cost per share.

This plan lets you profit from market volatility. That’s because you’ll automatically buy more shares when prices are low, and fewer shares when prices are high.

In retirement, you reverse the process. You live off your dividends, and sell stocks mainly when you need more money. When you do that, you sell your lower-quality holdings first. That way, you upgrade the quality of your portfolio every time you sell any of your stocks.

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