Good companies to invest in have strong business prospects, and offer low risk with high return potential

Many good companies to invest in acquire a blue-chip reputation by displaying the qualities that the definition suggests. Watch out though: some 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.

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Why blue chip companies are good companies to invest in

Blue chip companies are typically defined as firms whose stocks have a national reputation for quality, reliability and the ability to operate profitably in good times and bad. However, the problem is that “reputation” plays a key role in the definition.

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

When assessing blue chip companies, you need to ask: What are they doing to remain vital? These companies hold strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.

Stocks like these give investors an additional measure of safety in today’s volatile markets. And the best ones offer an attractive combination of low 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.

Bonus Tip: Good companies to invest in: Consumer product companies

Strong consumer product companies share a number of characteristics. These include geographic diversity to protect them from regional economic difficulties, a record of rising cash flow and strong balance sheets. All these are characteristics of blue chip stocks.

We like high-quality blue chip consumer product companies because they can provide stability during a recession or economic slowdown. Typically, consumer product companies sell staples, like soap, soup and beverages that consumers buy no matter what the economy is doing.

We believe that a record of increasing dividend payments is a good indication of a strong company—including consumer product firms—especially in a slow economy. High-quality blue chip stocks will usually be in a position to remain profitable during almost any type of economic hardship or recession. Plus, you get paid dividends and earn income while you hold these stocks, even if share prices are falling.

Characteristics of top blue chip stock companies

Blue chip investments should 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 stock picks, you’ll avoid most frauds.

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 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 influence legislation, industry trends and other business factors to suit themselves.

Good companies to invest in 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 is good, multinational better. There’s extra risk in firms confined to one geographical area.

Avoid selling your blue chip shares way 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 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.

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.

What good companies to invest in do you recommend? Please share your thoughts with us in the comments.