If you want an extra level of security in your portfolio, then you should look for blue chip Canadian stocks

The root of the term “blue chip” stems from the game of poker, as the blue chips represent the highest value. Investing in blue chip stocks can give you an additional measure of safety in turbulent markets.

Here are the characteristics, and some examples, of top-quality blue chip Canadian stocks.

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Characteristics of blue chip Canadian stocks

The best blue chips offer both capital gains growth potential and regular dividend income. The dividend yield is certainly one of the most concrete indicators of a sound investment. It is the percentage you get when you divide the current yearly dividend payment by the share or unit price of the investment. It’s an indicator we pay especially close attention to when we select stocks to recommend in our investment newsletters.

We feel most investors should hold the largest part of their investment portfolios in securities from blue chip companies. All these stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above average-growth prospects in expanding markets.

Blue chip Canadian stocks paying dividends: A strong investment in any market

A company with a long-term record of paying dividends is generally one that is most deserving of the “blue chip” label in its traditional sense. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

That’s not to say there won’t be surprises that affect every company in a particular industry. But well-established, dividend-paying stocks have the asset size and financial clout—including solid balance sheets and strong cash flow—to weather market downturns or changing industry conditions.

Canadian dividend stocks offer both capital-gain growth potential and regular income. In fact, dividends are still likely to be paid regardless of how quickly the price of the underlying stock rises.

Dividends from Canadian companies come with a tax credit, to reflect corporate income taxes. This cuts your tax rate.

It’s realistic to assume dividends from blue chip companies will continue to contribute around a quarter 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 an advantage 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 the market’s worst stocks.

We’ve recommended buying the five top Canadian bank stocks since the 1970s

Canadian banks have gone through periodic and sometimes lengthy slumps, like any other stock group. They occasionally make costly management errors. On rare occasions, they have suffered from adverse regulatory decisions.

This is what pessimistic investors might say about top Canadian bank investments. But because these stocks have grown, paid high dividends and have generally been available at highly attractive prices, they’ve provided well-above average investment returns for decades.

Avoid selling your blue chip Canadian stocks too early

It’s all too easy to sell a stock that looks like it’s headed for a downturn, only to buy another that is headed for a collapse. For that matter, if you make a habit of selling whenever you feel the market’s risk has gone up, you will wind up selling your best stocks way too early.

Before you act on a selling rationale, take a broader look. Consider facts about the stock, and about your investment goals and temperament. It’s always a bad idea to sell a good stock for trivial or transitory reasons.

Which sector and holdings in your portfolio come to mind when you think about blue chip Canadian stocks? Share your thoughts with us in the comments.