It’s important to learn the key qualities of top blue chip stocks before you add them to your portfolio
You can look at blue chips as among the strongest and most secure stocks in the market. Investing in blue chip stocks can provide an additional measure of safety in turbulent markets.
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.
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.
The top blue chip stocks offer an attractive combination of low p/e’s (price-to-earnings ratio), steady or rising dividend yields (annual dividend divided by the share price), and promising growth prospects.
Tips for investing in the top blue chip stocks
Invest mainly in high quality stocks: It’s essential to invest in stocks that have some history of sales, if not profits. If you break this rule and invest in, say, junior mines or tech startups, you should only do so if you have an exceptionally high opinion of the value of the junior’s assets and/or business plan, and you buy with money you can afford to lose. After all, you could very well be mistaken about their value. Your low-quality buys might eventually wind up worthless.
Spread your stocks over most if not all of the five main sectors: If you diversify across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities), and stick mainly to high quality blue chip stocks—then you can be almost certain of long-term gains in excess of what you’d get with any other investment approach.
Avoid or downplay stocks in the broker/media limelight: Investors can build up unrealistic expectations when blue chip stocks spend time in that limelight. When broker/media favourites fail to live up to those expectations, they drop much further than they would have if they had been less widely followed.
Also, “holding for the long term” usually only pays off with investments in high-quality stocks. If you buy low-quality or speculative stocks, time tends to work against you. The longer you hold them, the likelier you are to lose money.
Be wary of any blue chip stock with an unusually high dividend yield: 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.
Top blue chip stocks 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.
Top blue chip stocks may have hidden assets in real estate or branding
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. 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.
After a series of satisfactory dealings, long-time customers develop a level of trust that makes them receptive to related offerings from a company. Brands or trademarks can be a huge hidden asset.
How top blue chip stocks can benefit 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 our three-pronged approach—diversifying across most if not all of the five main economic sectors, stick mainly to well-established companies and companies outside the media limelight—then you can be almost certain 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, along with everybody else’s. But we think they will go down less and recover sooner.
Do you have any top blue chip stocks in your portfolio currently? How have they performed? Share your story with us in the comments.
This post was originally published in 2016 and is regularly updated.
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