Understanding blue chip stocks’ meaning and benefits will help you make better stock selections from the best shares on the market

Do you know blue chip stocks’ meaning? You may be surprised to find out that the root of the term “blue chip” stems from the game of poker, as the blue chips represent the highest value.

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 chip companies offer both capital gains growth potential and regular dividend income.

Blue chip stocks also have strong positions in healthy industries. In addition, they have solid management that will make the right moves to remain competitive in a changing marketplace.

Know the blue chip stocks’ meaning to help you invest better

We define a blue chip company as a well-established company with attractive business prospects. Well-established stocks have the asset size and the financial clout—including solid balance sheets and strong cash flow—to weather market downturns or changing industry conditions.

Blue chip companies can give investors an additional measure of safety in today’s volatile markets. And the best ones offer an attractive combination of moderate 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.

We feel most investors should hold the bulk of their investment portfolios in securities from blue chip companies. All 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, compared to alternative investments.

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Blue chip stocks can bring powerful long-term increases to your portfolio—from both dividends and capital gains

Some good companies reinvest their profits instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So, if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

We look for dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc. to suit themselves. Minor firms can’t do that.

Dividend stocks are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend payers. That’s why the majority of your stocks should be dividend payers at all times. As you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio to cut risk and improve the stability of your investment results.

Canadian blue chips are among the best dividend-paying stocks

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.

That’s not to say there won’t be surprises that affect every company in a particular industry. But regardless of whether investors opt for stocks with a high dividend yield, picking well-established, dividend-paying stocks benefits most investors.

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

What’s more, dividends from Canadian companies may come with a tax credit. This cuts your effective tax rate.

All in all, it’s realistic to assume dividends from blue chip companies will continue to contribute substantially to your total return.

Understand blue chip stocks’ meaning within the context of your diversified portfolio to get the right balance of investments

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.

Know blue chip stocks’ meaning to the value of your portfolio over time

There are also 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.

As mentioned, dividends are a key factor. For a true measure of stability, focus on those companies that have maintained or raised their dividends during economic or stock-market downturns.

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.

Use our three-part Successful Investor approach while looking for the best dividend stocks

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.

Does the price associated with blue chip stocks stop you from buying?

Do you prefer to target cheaper stocks that may become growth stocks, or do you like the stability of blue chips?