They are some of the best investments on the market, so what are blue chip stocks doing that other stocks aren’t? Here’s what you need to know

What are “blue chip” stocks? Blue chip stocks come from companies whose stocks have a national reputation for quality, reliability and the ability to operate profitably in good times and bad.

To practice the Successful Investor method, you need to get acquainted with a number of well-established blue chip stocks with a history of earnings and, in most cases, dividends.

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.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

What are blue chip stocks? Some of your most reliable investments

In plain English, when you ask, “what are blue chip stocks?” the answer is usually shares in a company you already know. Companies that have stood the test of time and pose less risk to an investor even in the worst financial crises are blue chip companies. Coca-Cola and Apple are two good examples.

Many companies acquire a blue-chip reputation by displaying the qualities that the definition suggests. On the other hand, others get it through a strong public relations effort or by being in the right industry or business situation at the right time and place. Regardless of how it got there, this blue-chip label sticks with companies long after they quit living up to it.

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.

Characteristics of blue chips worth consideration

As mentioned, blue chip stocks we recommend have a history of earnings and, in most cases, a history of sustainable dividends. They have established their value over the long term. Like all stocks, they can fluctuate widely and many suffer in a long-term market downturn, but they offer a higher probability of long-term gains.

We feel most investors should hold a substantial portion of their investment portfolios in securities from blue chip companies. 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, compared to alternative investments.

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.

What are blue chip stocks worth over the long term?

The blue-chip investments we recommend have a history of profits going back for at least 5 to 10 years. Companies that make money regularly are safer than chronic or even occasional money losers.

Blue chip companies can give investors an additional measure of safety in volatile markets. And the best ones offer an attractive combination of moderate 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.

How we recommend investing in the best blue chip dividend stocks:

• Avoid or downplay stocks in the broker/media limelight.
• Be wary of blue chip stocks with an unusually high dividend yield.
• Invest mainly in high quality stocks.
• Spread your stocks over most if not all of the five main sectors.
• Look for hidden assets such as real estate or branding.

Bonus: Avoid selling your blue chip shares 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.

You can always find a rationale for selling. Market commentators are continually thinking up new ones, based on recent market strength or weakness, historical market patterns, political or economic predictions, changes in tax policies—the list is endless. This is a good thing. After all, you can only buy a stock if somebody who owns it wants to sell.

Before you act on a selling rationale, take a broader look. Consider facts about the blue chip stock, as well as your investment goals and temperament. If the selling rationale makes sense and you find additional good reasons to sell, then selling may be the right thing to do. But it’s always a bad idea to sell a good stock for trivial or transitory reasons.

Can you share the details of a blue chip stock investment decision you made that turned out to be one of the best or worst investments of your career?

If you don’t have a large percentage of blue chip stocks in your portfolio, what is the reason you’ve held off?