You can find long-term security and profits in blue chip investing

We see blue chips as among the strongest and most stable stocks in the market.

Blue chip investing involves stocks that 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.

Why blue chip 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 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. Ideally, 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.

How can blue chip investing 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.

Ways to pick the right blue chip investments to hold

1. Good blue chip investments 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.
2. Blue chip investments should have industry prominence if not dominance. Major companies can influence legislation, industry trends and other business factors to suit themselves.
3. Good blue chip investments often have hidden assets in the form of real estate. For instance, 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.
4. Review the company’s finances going back 5 to 10 years. The types of blue chip investment we recommend will generally have a history of profits going back for at least that long. Companies that make money regularly are safer than chronic or even occasional money losers.

Watch out for unusually high dividend yields in blue chip investing

Be wary of blue chip shares with unusually high dividend yields. 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.

Investing in blue chip stocks can provide an additional measure of safety in today’s turbulent markets. And the best ones 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.

Blue chip shares have strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.

If you’re invested in blue chip shares, you’re well on your way to boosting your investment returns. Blue chip shares are well-established stocks that have the asset size and the financial clout—including sound balance sheets and strong cash flow—to weather market downturns or changing industry conditions.

Is blue chip investing part of your overall investment strategy? Please share your experience with blue chip stocks in the comments.