The best blue chip stock companies offer low risk and high return potential

Blue chip stock companies are generally well-established, dividend-paying corporations with strong business prospects. These are companies that also have strong management that will tend to make the right moves to compete in a changing marketplace.

At TSI Network, we think investors will profit most—and with the least risk—by buying shares of blue chip, dividend-paying stocks. The best blue chips offer both capital gains growth potential and regular dividend income.

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How blue chip stock companies 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, avoiding stocks in the broker/media limelight, and sticking mainly to well-established companies—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. For that matter, nobody can put a limit on how deep a market setback will go, nor how long it will last.

If a deep or long-lasting market setback does occur, any aggressive stocks you own 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 portfolios 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 is lower. However, standards change. Many attractive stocks now trade at 15 to 25 or more times earnings. If their earnings drop due to business conditions, and if the market p/e falls to, say, 10 to 15 times earnings, then even stocks of blue chip companies are going to suffer.

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

More tips for investing in blue chip stock companies

Avoid or downplay stocks in the broker/media limelight: Investors can build up unrealistic expectations when blue chip stocks spend time in that limelight. When broker/media favourites fail to live up to those expectations, they drop much further than they would have if they had been less widely followed.

Also, “holding for the long term” usually only pays off with investments in high-quality stocks. If you buy low-quality or speculative stocks, time tends to work against you. The longer you hold them, the likelier you are to lose money.

Be wary of any blue chip stocks with unusually high dividend yields: Investors should avoid judging a company based solely on its dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price). That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a dividend paying stock’s yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut.

Are you investing in blue chip stock companies already? How have they performed for you? Share your experience with us in the comments.