The best Canadian blue-chip stocks offer sound value, and represent companies that come with a combination of manageable debt, strong management, a history of success and, ideally, hidden assets

The root of the term “blue chip” stems from the game of poker, as the blue chips represent the highest value. In poker as in stocks, luck averages out over time. You can’t profit in either one all the time. But you can improve your luck by learning how to avoid dumb mistakes.

Investing in Canadian blue chip stocks can give you an additional measure of safety in volatile markets.

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.

Characteristics of the best Canadian blue chip stocks:

Good blue chip companies have the freedom to serve (all) shareholders: High-quality stocks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies.

Geographic diversification: Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.

Good blue chips have manageable 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.

Most of the best blue chip investments pay dividends: Review a company’s 5 to 10 year record of paying dividends. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stocks, you’ll avoid most frauds.

Blue chip companies should have industry prominence if not dominance: Major companies can influence legislation, industry trends and other business factors to suit themselves.

Extra value behind Canadian blue chip stocks: Hidden assets

Some blue chip companies may have a hidden asset in their relationship with loyal customers. After a series of satisfactory dealings, long-time customers develop a level of trust that makes them receptive to related offerings from the company. For example, Apple Computer was able to move into the digital music player and smartphone businesses as quickly as it has because the established core of fans for its Mac computers.

Top blue chip investments may also 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. You have to look closely to spot this hidden value. At times, the hidden value in a company’s real estate can come to exceed the market value of its stock. This hidden value may only become apparent to investors when the company upgrades the use of the real estate. For example, a merchandiser might repurpose a parking lot to build a shopping mall with a residential condo tower on higher floors, and a parking garage down below.

Canadian blue chip stocks handle market setbacks better than other investments

In a deep or long-lasting market setback, your blue chip stocks will tend to go down, along with other stocks. But we think they will go down less, and recover sooner, than most of the aggressive stocks you own. Those aggressive stocks are likely to fall more than shares of blue chip companies. The eventual recovery of aggressive stocks is also less certain. That’s why we recommend that you hold the bulk of your investment portfolio in securities from blue chip companies.

If your stocks offer good “value”—if they trade at reasonable multiples of earnings, cash flow, book value and so on—then your risk should be even lower.

How to use the Successful Investor approach to select the best Canadian blue chip stocks

Buying Canadian blue chip stocks is a key part of our Successful Investor philosophy:

• Invest most if not all of your money in well-established companies that have a history of earnings if not dividends.
• Spread your money out across most if not all of the five main economic sectors.
• Downplay or avoid stocks that are in the broker/media limelight. This limelight can bloat investor expectations. When stocks fail to live up to excessive expectations, downturns can be brutal.

When blue chip stocks get too popular their safety can be in question. What other dangers have you encountered with blue chip stocks?