A blue chip company definition and some examples of blue chip companies we recommend

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.

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The dividend yield is certainly one of the most concrete indicators of a sound investment. It is the percentage you get when you divide the current yearly dividend payment by the share or unit price of the investment. It’s an indicator we pay especially close attention to when we select stocks to recommend in our investment newsletters.

What are blue chip companies?

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 stocks have strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.

Because of this, 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.

How can blue chip companies 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 two-pronged approach—diversifying across most if not all of the five main economic sectors, 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. But nobody can guarantee that. 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 all 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.

What are blue chip companies most investors would recognize?

1. FedEx began offering air-delivery services in 1973, under the Federal Express banner. It’s now one the world’s largest shipping firms.
2. Imperial Oil is Canada’s second-largest publicly traded oil company, after Suncor Energy. Imperial is a 69.6%-owned subsidiary of U.S.-based ExxonMobil (New York symbol XOM).
3. Microsoft is the world’s largest software company. Its Windows operating system powers about 90% of the world’s personal computers. Microsoft’s other main product— its Office suite, which includes a word processor (Word) and spreadsheet program (Excel)—controls 90% of this market. Over the past few years, Microsoft has expanded into computer-hardware products, including its Xbox video game console and Surface tablet computer.
4. Great-West Lifeco is Canada’s second-largest insurance company, after Manulife Financial. It also offers mutual funds, retirement planning and wealth management. Power Financial owns 67.1% of Great-West.
5. 3M started up in 1902, when it was called the Minnesota Mining & Manufacturing Company. Today, 3M makes more than 55,000 items, including air purifiers, medical device components and bandages. Top-selling brands include Post-it notes, Scotch tape, Scotch-Brite cleaning products, Scotchguard protection and Thinsulate insulation.

Can you think of any other factors that can be added into the standard blue chip company definition? What are some of your favorite blue chip companies?

This post was originally published in 2015 and is regularly updated.