What is a blue chip stock’s role in a well-diversified portfolio? Read on, for our answer—plus we’ll tell you how to find the best of those stocks.

What is a blue chip stock and what is its value in your portfolio? First, let’s explain blue chip stocks. A blue chip stock is typically a stock in a company that is a household name. And the top blue chip stocks have stood the test of time. Coca-Cola and Apple are two good examples.

Savvy investors invest in blue chip stocks for the long term. They don’t expect spectacular short-term gains, but they do bank on steady returns over time.

True Blue Chips pay off Learn everything you need to know in 'The Best Blue Chips for Canadian Investors' for FREE from The Successful Investor. Canadian Blue Chip Stocks: Bank of Nova Scotia Stock, CP Rail Stock, CAE Inc. Stock and more.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

What is the value of a high-quality blue chip stock to a diversified portfolio? It could be your key to long-term stability

The blue chip investments we recommend generally 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 hoping to save for retirement 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.

Here are some things to watch for when looking for the best blue chips

As mentioned, 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 of course 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 also have above-average growth prospects, compared to alternative investments.

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 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 is a blue chip stock worth to your portfolio? Find these four characteristics and you could profit:

• Blue chip investments should have industry prominence if not dominance.
• Blue chip investments should pay dividends.
• Blue chip investments should have low debt.
• Blue chip investments should have the freedom to serve (all) shareholders.

Here’s what else investors should look for in blue chip stocks

The best blue chips offer both capital gains growth potential and regular dividend income.

Good blue chip investments may have hidden assets, such as real estate. For instance, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the purchase price remains unchanged on the balance sheet. You have to look closely to spot this hidden value. At times, the hidden value in a company’s real estate can come to exceed the market value of its stock. This hidden value may only become apparent to investors when the company upgrades the use of the real estate. For example, a merchandiser might re-purpose a parking lot to build a shopping mall with a residential condo tower on higher floors, and a parking garage down below.

Additionally, some blue chip companies may have a hidden asset in their relationship with loyal customers. After a series of satisfactory dealings, long-time customers develop a level of trust that makes them receptive to related offerings from the company. For example, Apple was able to move into the digital music player and smartphone businesses as quickly as it did in the past decade because it had an established core of fans for its Mac computers.

Add top blue chip stocks to your portfolio by using our three-part Successful Investor approach

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.

Some companies hold a blue chip reputation but over time lose the characteristics and qualities of a blue chip investment. How do you ensure that a blue chip stock is actually a blue chip?

Do you think blue chip stocks still offer the stability they promise? Or are there better options for limiting risk in your portfolio?