Here are some tips for finding the best blue chip dividend stocks for your portfolio.

The best blue chip dividend stocks 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 and to our portfolio management clients.

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We feel most investors should hold the largest part of their investment portfolios in securities from blue chip companies. Most of 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.

Characteristics of the best blue chip dividend stocks

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 always 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 best 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 operations are also good, multinational better. There’s extra risk in firms confined to one geographical area.

Here’s how we suggest 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 in real estate or branding.

How the best blue chip stocks can 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.

Canadian dividend stocks are 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.

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

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

Avoid selling the best blue chip dividend 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 ends up collapsing. 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 stock, and about 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.

Are you holding the best blue chip dividend stocks in your portfolio? Are they the top investments in there? Share your story with us in the comments.

This article was originally published in 2017 and is regularly updated.