How to manage your investments in dividend-paying blue chip stocks

Guard the top dividend-paying blue chip stocks in your portfolio with these investment strategies.

Whether the market is volatile or relatively buoyant as it is now headed into 2018, it pays to keep the mechanics of successful investing in mind. 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 investors too much during those inevitable periods when business or the markets are bad.

Top dividend-paying blue chip stocks should be a focal point of successful investing, and below we share some recommendations with you. After reading this advice, if you want to know which dividend-paying blue chip stocks we consider the best, you could subscribe to our TSI Dividend Advisor.

When to trust your dividends

“One of the best ways to judge whether a company will keep paying its dividend, or even increase it, is the dividend payout ratio. This simply measures what portion of a company’s earnings are allotted to paying dividends. If a company keeps its payout ratio fairly steady, say at 7% of earnings, and its earnings grow…”
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Strategies for investing in top dividend-paying blue chip stocks

Follow our rules over long periods and you’ll probably achieve better-than-average investing results. Even so, your results will be uneven in a variety of ways. They’ll vary widely from year to year. In many years, most of your profits will occur in only a few of the five economic sectors; you may lose money in the others. Some years your U.S. stocks will provide most of the profits. Some years, your biggest profits may come from stock groups you hardly considered as groups such as stocks that trade on Nasdaq, or your biggest multinational companies.

Over long periods, you’ll probably find that a third of your dividend-paying blue chip stocks do about as well as you hoped, a third do better, and a third do worse. This is partly due to that random element in stock pricing that we’ve often mentioned. It also grows out of the proverbial “wisdom of the crowd.” The market makes pricing mistakes and continually reverses itself. But the collective opinion of all individuals buying and selling in the market eventually beats any single expert opinion.

When the market slumps, you may zero in on your worst performers, and dwell on what you could have done to avoid them. You may calculate how much more money you would have made, if not for hanging on to your worst stocks. This may lead you to “cut your losses,” as brokers say—sell your worst performers—just to avoid the stress of worrying about future losses. There’s potential danger in that strategy.

The history on top dividend-paying blue chip stocks

If you look back at the history of the most successful stocks on the market, you’ll find many have dropped 30%, 60%, even 90%, at one time or another, in past market declines. They then went on to recover.

Many investors try various ways of eliminating losing stocks from their portfolios. These efforts often backfire. Some lead you to sell stocks that had already fallen a great deal, and are ripe for a rebound. Others lead you to switch into better-performing groups, just when these groups may be on the verge of joining in the plunge. Worst of all, some may lead you to give up on the market altogether and “go into cash,” just when the entire market is close to a bottom.

If you discover a stock was a bad choice to begin with, or if you find reason to believe its outlook has soured due to some new development, then you should sell right away, regardless of what the rest of the market is doing. That’s different from selling because of how far it has fallen, or because you doubt that it will ever get back to the price you paid.

Typically, however, blue chip stocks that pay dividends have been paying them consistently for some time, which eliminates much of the risk with these kinds of investments.

Regular income from your portfolio of top dividend-paying blue chip stocks

Canadian dividend 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 how quickly the price of the underlying stock may rise.

Taxpayers in Canada who hold top dividend-paying blue chip stocks get an additional bonus. Their dividends can be eligible for the dividend tax credit in Canada. 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 profit with the least risk.

How top dividend-paying blue chip stocks benefit your portfolio

We advise investors to look for blue chip companies that pay dividends, and are likely to pay off if business and the stock market are good, and are least likely to hurt them much during those inevitable periods when business or the markets are bad.

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.

Even dividend-paying blue chip stocks can be worth selling at times. Have you sold a blue chip stock despite its solid dividend? Why?

Blue chip stocks can give your investment portfolio a solid base, but some investors sell them as soon as they start to drop. Have you ever sold a stock only to see it move up shortly after?

This post was originally published in 2009 and is regularly updated.


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