Blue chip companies are among the best companies to invest in for a variety of reasons we share in this article

The best companies to invest in include blue chip companies whose stocks have a national reputation for quality, reliability and the ability to operate profitably in good times and bad.

You can still look at blue chips as the strongest and most secure stocks on the market. Just be sure you look at the stock’s qualities and not just at the label.

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The best companies to invest in remain vital

When assessing blue chip companies, you need to ask: What are they doing to remain vital? These companies hold strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.

Stocks like these give investors an additional measure of safety in today’s volatile markets. And the best ones offer an attractive combination of low p/e’s (the ratio of a stock’s price to its per- share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.

5 characteristics of the best companies to invest in

Blue chip investments should pay dividends: Review a company’s 5 to 10 year record of paying dividends. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stocks, you’ll avoid most frauds.

Good blue chips 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.

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

Good blue chip investments have the freedom to serve (all) shareholders:High-quality stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies. Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.

These companies 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.

The best companies to invest in offer stability and more

It’s realistic to assume dividends from the best companies to invest in, like blue chip companies, will continue to contribute around a third of your total return. In addition:

Dividends can grow. Stock prices rise and fall. Interest on bonds holds steady at best. But dividend paying stocks like to ratchet their dividends upward—hold them steady in a bad year, raise them in a good one. That gives you a hedge against inflation.

Dividends are a sign of investment quality. Some good companies reinvest profit instead of paying dividends. But fraudulent and failing companies are hardly ever dividend paying stocks. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all of the market’s worst stocks.

For a true measure of stability, focus on those companies that have maintained or raised their dividends during economic and stock-market downturns. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.

Good companies to invest in: Consumer product companies

Strong consumer product companies share a number of characteristics. These include geographic diversity to protect them from regional economic difficulties, a record of rising cash flow and strong balance sheets. All these are characteristics of blue chip stocks.

We like high-quality blue chip consumer product companies because they can provide stability during a recession or economic slowdown. Typically, consumer product companies sell staples, like soap, soup and beverages that consumers buy no matter what the economy is doing.

We believe that a record of increasing dividend payments is a good indication of a strong company—including consumer product firms—especially in a slow economy. High-quality blue chip stocks will usually be in a position to remain profitable during almost any type of economic hardship or recession. Plus, you get paid dividends and earn income while you hold these stocks, even if share prices are falling.

Does your portfolio involve stock with the qualities of the best companies to invest in? Share your thoughts with us in the comments.