Understand that no investment is “safe”, but the safest blue chip stocks have a history of success and years of dividend payments

Top-quality stocks tend to lose less of their value in the kind of severe market setback we’re experiencing today. They also tend to bounce back nicely when conditions improve. These are the kinds of stocks we continue to recommend in our newsletters and other services.

To build a portfolio of those stocks—and to show the best long-term results, Pat McKeough still thinks you should stick with his three-part program:

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

There are a host of key indicators to determine if a security is a safer investment, like management integrity, the company’s growth prospects and its stock price in relation to its sales, earnings, cash flow and so on.

Dividends are a key factor in many of the safest blue chip stocks. For a true measure of stability, focus on those companies that have maintained or raised their dividends during economic or stock-market downturns.

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Discovering the safest blue chip stocks available

Are blue chip stocks safe? While there are no guarantees in stock investing, at TSI Network we feel that blue chip stocks that have been paying dividends for five to 10 years or more are among the safer investments you can make. Dividends are a sign of quality and a company’s financial health. Dividend-paying stocks that we consider to be safer investments include Canadian banks and utilities.

Overall, we think investors will profit most—and with the least risk—by buying shares of well-established, dividend-paying stocks with strong growth prospects.

Find out what dividends from the safest blue chip stocks mean to you as an investor

A couple of decades ago, you could assume that dividends would supply up to about one-third of the stock market’s total return. Some dividend yields are lower than they used to be, of course. But it’s still safe to assume that dividends will supply perhaps as much as a third of the market’s total return over the next few decades. 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 profits 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.

Avoid selling your blue chip stocks too early if you want to reap their benefits

It’s all too easy to sell a blue chip investment 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 sell a stock if somebody wants to buy it.

Before you act on a selling rationale, take a broader look. Consider facts about the blue chip investment, 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.

Think like a portfolio manager to find the safest blue chip stocks available

As part of their stock market research, portfolio managers gather information from companies, industry studies and other sources. A good portfolio manager then tries to build the client a portfolio that makes money if things go well, but won’t lose too much if the opinions turn out to be faulty, as often happens.

We do our own stock market research for our newsletters and investment services, and we apply it from a portfolio manager’s perspective. That’s why we advise sticking to well-established companies; they tend to hold on to more value when things go wrong, or at least tend to recover more quickly.

Bad times usually hit some market segments much more severely than others. That’s why we advise spreading your money out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

Not all blue chip stocks are worth holding indefinitely. What type of events convince you to sell?

How much of your portfolio consists of blue chip stocks?