Here’s our advice on how to invest in blue chip stocks successfully, even amid concerns of a market downturn.

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.

Here are more tips on how to invest in blue chip stocks if you want to make safer investments while generating consistent income.

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How to invest in blue chip stocks for dividend income

The best blue chip stocks offer both capital gains growth potential and regular income from dividend payments. In fact, dividends are likely to be paid regardless of fluctuations in the price of the underlying stock.

What’s more, taxpayers in Canada who hold top dividend-paying Canadian blue chip stocks get an additional bonus. Their dividends can be eligible for the dividend tax credit. This means that dividend income will be taxed at a lower rate than the same amount of interest income.

When you add the security of stocks with a record of dividend payments going back many years to the potential for tax-advantaged capital gains plus dividend income, Canadian dividend-paying blue chip stocks become an attractive way to increase returns with less risk.

How to invest in blue chip stocks: Diversify

One way to make sure you maximize your returns from blue chip shares is to make sure you are diversified across most if not all of the five main economic sectors. Manufacturing and Resource stocks generally involve extra risk, Canadian Finance and Utilities entail lower risk, and the Consumer sector falls somewhere in between. Sectors go in and out of investor favour, depending on economic conditions, corporate earnings, and so on. But in the long run, winners and losers will appear in all five.

If you only hold blue chip shares in just, say, two sectors, you may get lucky and all of your picks will be successful ones. But all your stocks could wind up out of favour and decline. If you have to sell, you’ll do so when prices are low. So, spread your money out to eliminate random factors. That way, you’ll always have exposure to the year’s most profitable sectors, one of the keys to successful investing.

How to invest in blue chip stocks: What about market setbacks?

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.

If your stocks offer good “value”—if they trade at reasonable multiples of earnings, cash flow, book value and so on—then your risk should be lower.

How to invest in blue chip stocks: Don’t sell to early

Selling good stocks in anticipation of a market downturn is one way investors can fail to maximize their gains in blue chip shares. In times of market pessimism, many investors are tempted to sell all of their stocks, regardless of quality, in hopes of getting back in at lower prices.

However, selling to avoid a market downturn rarely works out as neatly or as profitably as sellers hope. First, some stocks hold steady or go up during a downturn—and these are often the strongest stocks in the subsequent upturn. Sometimes the downturn ends much more quickly than you expected. To get back in you may find yourself buying stocks months or even years later, at much higher prices.

Other times, the market moves up, the seller buys back in, and the real downturn strikes. That can leave you down 20% or more on a 10% market downturn. Be careful about the blue chip shares you sell, and always keep a long-term market perspective in mind.

How top dividend-paying blue chip stocks benefit your portfolio

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, often leading to an extended period of growth.

How do you handle blue chip holdings that are out of favour?

Do you worry that your blue chip stocks won’t do well in a market setback, or do you think they are the best possible place to invest?