Test your knowledge with our QUIZ on how to invest in blue chip companies for superior portfolio returns

Although we think the best blue chip stocks are worth holding on to more or less indefinitely, we do keep an open mind and watch them carefully. After all, they are subject to the usual risks. Competitors can overtake them. Expected contracts can fall through. They can lose key employees, run into union or regulatory problems, and so on.

Continue on below to quiz yourself on how to invest in the top blue chip companies.

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A. True or false: Given that the best blue chips pay dividends, is it realistic to assume those dividends can contribute around a third of your total return?

You are correct if you answered “True.”

It’s realistic to assume dividends from blue chip companies will continue to contribute around a third of your total return.

Additionally, remember these two notions: Dividends can grow and they are a sign of investment quality.

Stock prices rise and fall. Interest on bonds typically holds steady at best. But dividend paying stocks like to ratchet their dividends upward—hold them steady in bad years, raise them in good ones. That also gives you a hedge against inflation.

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

 B. When you are considering how to invest in blue chip companies, start by looking for…

1. A history of earnings
2. A history of sustainable dividends
3. A company that has established its value over time
4. All of the above

You are correct if you answered 4.

Blue chip stocks we recommend have a history of earnings and, in most cases, a history of sustainable dividends. They have established their value over the long term. Like all stocks, they can fluctuate widely and many suffer in a long-term market downturn, but they offer a higher probability of long-term gains.

We feel most investors should hold a substantial portion of their investment portfolios in securities from blue chip companies. 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 have above-average growth prospects, compared to alternative investments.

C. During an economic slowdown, top blue-chip companies in which sector are best positioned to weather the storm?

1. Companies are in the resources sector
2. Companies that are in the consumer sector and have geographic diversity, a record of rising cash flow, and strong balance sheets
3. Companies that are able to sell all of their assets
4. None of the above

You are correct if you answered 2.

Strong consumer product companies share a number of characteristics. These include geographic diversity, a record of rising cash flow and strong balance sheets.

At TSI Network, we see high-quality blue chip consumer product companies as part of a balanced portfolio because they can provide stability during a recession or economic slowdown. Typically, consumer-product companies sell staples that consumers must buy no matter what the economy is doing like soap, soup and beverages.

D. There are important dividend dates to know for anyone learning how to invest in bluechip companies. These include the…

1. Declaration date

1. Payable date
2. Record date
3. Ex-dividend date
4. All of the above

You are correct if you answered 5.

Here is a look at each of these dates:

• Declaration Date: Several weeks in advance of a dividend payment, a company’s board of directors sets the amount and timing of the proposed payment. The date of that announcement is known as the declaration date.
• Payable Date: is the date set by the board on which the dividend will actually be paid out to shareholders.
• Record Date: Only shareholders who hold dividend stocks before the payable date will receive the dividend payment. That date is known as the record date, and is set any number of weeks before the payable date.
• Ex-dividend Date: One business day before the record date, the shares begin to trade without their dividend.

E. If a blue-chip stock is worth investing in then you should:

1. Buy now if it fits into your diversified portfolio
2. Wait until the price decreases
3. Wait until the stock splits
4. Avoid it because it will likely hit a setback

You are correct if you answered 1.

Our stock trading advice is that if a stock is truly worth investing in, you should be willing to buy it at current prices, even if that means you run the risk of having to sit through a 5% to 10% setback. Before it puts on its next 5% to 10% setback, after all, it may first go up 50% to 100%.

Bonus tip: Use our three-part Successful Investor approach to pick better blue chip 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.

What’s little-reported or understood challenge to investing in blue chip companies have you come up against?