When comparing penny stocks vs blue chip stocks, only one provides value and consistency. Here’s how to evaluate them and maximize your investment returns.

Penny stocks are generally riskier than other investments, and early success can (paradoxically) lead to big losses. On the other hand, blue chip investments are well-established companies with attractive business prospects. Penny stocks vs blue chip stocks is an easy comparison. Let’s take a look at the reasons why.

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Penny stocks vs blue chip stocks: long-term returns

Penny stocks: Although the price may seem right, the average penny offers a poor long-term return. After all, it’s hard to create a successful business. It’s much easier and cheaper to set up a company and sell stock to the public. That’s why bad penny stocks always outnumber good ones.

Penny stocks can also be more easily manipulated than most stocks that trade on exchanges because of their generally low trading levels and the resulting price volatility. Combine this with a lack of regulatory oversight on some stock exchanges and the fact these companies are easy to launch, and you can appreciate why investment frauds are more common with penny stocks.

Blue chip stocks: The blue-chip investments we recommend have a history of profits going back for at least 5 to 10 years. Companies that make money regularly are safer than chronic or even occasional money losers.

Blue chip companies can give investors an additional measure of safety in 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.

Penny stocks vs blue chip stocks: Paying dividends

Penny stocks: Penny stocks rarely pay dividends.

Blue chip stocks: On the other hand, the best blue chip stocks, like Canadian dividend stocks, offer both capital-gains growth potential and regular income from dividend payments. In fact, dividends are likely to still be paid regardless of how quickly the price of the underlying stock rises.

When you add in the security of stocks that have dividend records going back many years or decades, and include the potential for tax-advantaged capital gains as well as dividend income, Canadian dividend stocks are an attractive way to increase profit with the least risk.

Penny stocks vs blue chip stocks: The odds of success

Penny stocks: The odds against success are high with penny stocks.

If you lose money in speculative or other low-quality stocks (or ETFs that invest in low-quality stocks), you may think your main mistake was bad timing. That’s a misconception. You can get lucky in penny stocks vs blue chip stocks–just as in a lottery. But if you play long enough, the “house odds” eventually triumph over any run of luck. It’s why we discourage you from making speculative penny stocks a key part of your investment retirement formula.

In penny stocks, vs blue chip stocks, the odds are against you. So, time works against you. The longer or more often you play, the likelier you are to lose and suffer set backs to your retirement formula.

Penny stocks are almost always involved in riskier ventures such as finding mineral deposits that can be mined at a profit, commercializing unproven technologies or launching new software.

When penny stock promoters manage to make a deal with a major firm, they often go to great lengths to make it seem bigger than it is. It pays to remember that a big company doesn’t go into a situation like this the same way you do. The big company will always reserve the right to drop out and cut its losses. In most cases, it will exercise that right.

If you’re buying penny stocks that are perpetual money losers, they will eventually go broke, no matter how impressive their technology. That’s another reason we advise against making penny stocks a core part of an investor’s retirement formula.

Blue chip stocks: Blue chip stocks are your best promise of investment quality and should be the foundation for any investor’s retirement formula. Those stocks provide strong returns for years to come.

Well-established companies with a history of sales and profits, if not dividends, are your best choice for long-term investment success–especially given the uncertainty stemming from the pandemic. They tend to survive the bad times and go on to thrive anew when good times return, as they inevitably do. You put the odds in your favour even more if you use our three-part strategy to build a portfolio of well-established companies.

Do you think it’s worth the risk to invest in penny stocks? What do you look for in a penny stock to make it worth the risk?

This article was originally published in 2017 and is regularly updated.