The blue-chip stocks represent the elite of investment stocks. These are stocks of companies with a steady cash flow, stable balance sheets, a reliable business structure and exemplary performance.
These companies have been around for a long time, just like Coca-Cola and Nestle.
Blue-chip stocks are among the safest investments because of their excellent performance over time and track record. You should include them in your portfolio to balance out possible losses during market downturns.
Blue-chip stocks are essential to any portfolio.
Blue-chip stocks are essential to your portfolio. Before we get into the details, let’s take a look at blue-chip stocks.
Table of Contents
What are blue-chip stocks?
Why you should have blue-chip stocks in your portfolio
How to identify blue chip stocks that best fit your investment portfolio:
The conclusion of the article is:
What are blue-chip stocks?
Blue-chip shares are the shares of well-established, large, stable companies who are leaders in their field and are well-known. Blue-chip stocks are valued highly, just like blue chips, which is the source of their name.
Investors are attracted to their strong financials and steady dividends.
Blue-chip stocks are a great way to build a portfolio that includes a steady dividend, dividend growth, low volatility and dependable growth.
Investors who have been in the market for a while consider them safer than other stocks. They will therefore be a great addition to your portfolio in uncertain times.
It’s important to choose the right blue-chip stock as not all will meet your expectations. Focus on the true value of the company to avoid overvalued shares.
Do not be deterred by the fact blue-chip stocks do not grow quickly. Focus on the steady gains and stability over the long-term.
Blue-chip stocks do not have a standard set of criteria to determine their status. However, they all share certain characteristics that make them stand out.
Blue-chip companies share the following characteristics:
Blue-chips have a long history of stability and earnings consistency.
Consistency: Dividend stocks that are blue-chips also show consistent dividend payments. The dividends per share tend to increase at a constant rate. Both returns on capital and equity are consistent.
They have an advantage due to their size and reputation. Due to their strong balance sheet and assets, these companies are able to borrow money for a lower rate than their competitors. They are able to be resilient because their products and services have a high quality and are diversified in multiple geographical locations.
Benchmark Indices Components Blue-chip companies are often included in benchmark indices such as The Dow Jones Industrial Average (DJIA), the S&P 500 (S&P 500), Nifty 50 (Sensex), etc. Benchmark indices consist of a collection of stocks and securities that are used to measure how other securities or stocks performed on the market.
Blue-chip stocks are real-life examples such as Nestle, Coca-Cola and Proctor and Gamble. Shell, McDonald’s and Amazon. These companies also appear on the Fortune 500.
After you’ve mastered the definition of a blue chip stock, let’s move on to why it is a good idea to include shares in your portfolio of well-known and profitable companies.
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Why you should have blue-chip stocks in your portfolio
Blue-chip stocks are an important part of a well-diversified portfolio. They are expensive, but they are worth the price in the end. Here are a few reasons.
- Safe Dividends
As a dividend investor, your primary concern is the safety and security of your dividends. You continue to receive your portion of the company’s profits. If the company ceases to pay dividends, you will no longer be a dividend shareholder. Dividends are a portion of the company’s profits that is distributed as quarterly payments to shareholders.
Smaller businesses and startups will typically invest all of their earnings in future growth, and won’t pay dividends. They may begin to pay dividends when they reach a sizeable company and have less internal investment options.
Dividends paid on blue-chip stocks, however, have consistently grown and remained consistent over the years. You can benefit from your portfolio income regardless of the daily fluctuations in share prices.
Dividends are a great way to protect against inflation, as they provide income that will likely increase with the cost of living.
Your dividends are safe with blue-chip companies because they have solid financial foundations. Investors trust them because they consistently pay and grow dividends. It is the main goal of every investment, and it’s a great way to accumulate wealth over time.
- High Returns on Investment
Blue-chip stocks historically have outperformed the stock market on average, with a return of 8% to 10%. When you reinvest dividends, blue-chip stocks could return as much as 12%. You should ideally reinvest dividends and returns automatically. You’ll also earn interest from your interest, allowing your portfolio to grow faster. - Safe Harbor Stocks
Blue-chip stocks are generally considered to be safe haven stocks. They are less volatile and more stable than penny stocks or smaller company’s stocks. They are not immune from losses when the market as a whole is hit but they will not disappoint you over the long term.
Buy-and-hold is the best strategy for blue-chip stocks. If you hold them for a long time, let’s say, decades, then they will always give high returns, regardless of market fluctuations. These stocks are very safe and rarely go bankrupt. These stocks offer a measure of security in a volatile stock market.
- Brand Recognition
Brand names are recognizable and popular. You can receive regular updates about the progress of companies through mainstream media. You can stay on top of the stock market without having to put in extra effort.
You may feel a sense of satisfaction as an investor if you support your investment, for example, by buying gas at Shell gas stations or drinking Nestle water bottled.
- Easy Access and Liquidity
Blue-chip stocks, because they are so popular, are easy to purchase and sell. This benefit will be more apparent when you are trying to sell stocks that are not popular. When the value of less popular investments starts to decline or you want to release equity, it can be difficult to sell them.
Blue-chip stocks can be among the most liquid investments available. You can trade these stocks at any time through brokers, online platforms, and fund managers.
- Diversification
Blue-chip firms are usually diversified in terms of product lines, location and demographics. British Petroleum is a good example. The company is an Oil and Gas Company, but also owns gas stations and convenience stores in America. The company also owns Wild Bean Coffee, a UK-based company. The company is able to serve both the retail and consumer markets, as well as the commodities markets.
It is clear that investing in blue-chip stocks can provide the same level of diversification as three or more smaller growth and value companies. You will only pay one transaction fee. Diversification makes the company resilient, and it won’t close down if one of its products or markets fails.
- Diversified Portfolio
When you invest in blue chip companies, you protect a portion of your portfolio from volatility. Due to their high cost efficiency, these companies allow you to protect yourself against loss. They will mitigate your losses even when the market is experiencing a downturn due to their resilience. They are also known to recover faster than the market when it recovers. - Available Investment Options
Investors have a number of options to access blue-chip stock. Stocks can be purchased directly or through investment funds or ETFs. Choose from a variety of investment options including UK-based FTSE 100 companies, American S&P 500 or Korean Exchange. ETFs offer minimal transaction costs, which allows you to diversify your portfolio easily while keeping your costs down. - Strong Financial Fundamentals
Strong financial indicators are the foundation of blue-chip companies. These companies are characterized by a debt-equity balance that is ideal, a smooth operating cycle and strong financials.
You can feel more confident knowing that your portfolio is less volatile, has a lower risk of downside, and is able to react to market events better. Blue-chips are preferred by investors over other stocks on the market because of these factors.
Blue-chip stocks are a better investment for investors with low risk appetites. You want to make a decent profit without risking all of your money.
Blue-chip stocks may not grow exponentially, but their growth offers more security than regular stock.
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How to identify blue chip stocks that best fit your investment portfolio:
You are now convinced that blue-chip shares are the best way to build a more stable investment portfolio. Index funds and experienced investors are attracted to them because of their dominance on the financial markets.
Not all large-cap stocks are blue-chip. The size of a company does not necessarily indicate that it is blue-chip. How do you choose the best blue-chip stock out of the thousands available?
Size: The market capitalization or stock market value is used to determine the size of a company. The market capitalization of a publicly traded company is its outstanding shares. The value is calculated by multiplying the total number of outstanding shares by the market price.
Blue Chip stocks have a huge market capitalization, usually in the $5-10 billion range. These stocks also have large, steady revenue streams.
Start by looking at large-cap companies who are leaders in their respective industries. As you consider your investment preferences, and the composition of your ideal portfolio, determine which sectors and companies are the best to invest in.
After you’ve identified the largest companies in your chosen sector based on their capitalization, check out their income or revenue. The companies that you want to invest in should have a higher market share and therefore, higher revenue in the industry they operate in. Compare the revenue of the largest companies in that industry and invest in those with the highest.
Compare the Piotroski score (F-Score). A company’s strength in financial terms is an important factor when determining whether its shares are blue-chip. Piotroski Score (or f-score) is the tool of choice for determining financial strength.
The Piotroski score was created by Joseph Piotroski. It combines nine criteria to assess a company’s financial health. These criteria include: liquidity, profitability and operating efficiency.
According to his analysis, a business with a Piotroski score of 8 or 9 is considered financially sound and desirable. Financially, a company with a Piotroski score below 6 is considered in good shape. Companies with scores below 3 are considered economically weak and should not be trusted.
Return on equity (ROE). Return on equity or ROE allows you to identify companies that are more profitable compared to shareholders’ capital. This financial ratio measures how efficiently a company generates profit from shareholders’ money. If a company has a higher ROE, it means they are more efficient than their peers.
You should keep in mind that every industry or sector has a different acceptable ROE. A high ROE can be a good indicator for a blue-chip stock. However, you should ensure that the ROE data is from at least the last five years. If you can get a good ROE during that time period, then it’s a great blue-chip stock.
Return on Assets is the same as Return on Equity. It measures how effectively a company manages its shareholders’ money. The Return on Assets (ROA) identifies companies that use their assets to generate profits. The profitability of an enterprise is measured by its assets minus its debts.
A company’s ability to maximize its profits while maintaining optimal resource utilization is a positive sign. This shows the company’s ability to survive economic turmoil. You’ll want to have this type of stock in your portfolio.
The intrinsic value of a company is different from its market capitalization. Market capitalization is determined by the price of the stock. This is a completely different thing from the value of a company.
The price of a company is affected by factors such as demand and supply and the social and political climate.
It would therefore be counterproductive for a company to be judged solely by its market capitalization. Market value is the true value of a business.
You can make a profit if you purchase an under-priced stock. It is cheaper than its real value.
When looking to purchase blue-chip stocks, it is important to pay attention to their intrinsic value and not just the current price. Compare the intrinsic value of top companies within the industries that you are interested in to create a short list of blue-chip stocks.
The conclusion of the article is:
Blue-chip stocks should be a part of any portfolio. Blue-chip stocks have a solid business model, stable cash flows and a long history of dividend increases. They are among the safest stocks to buy. They are considered safe by seasoned investors due to their excellent track record and historically strong performance.
Blue-chip stocks are also susceptible to a fall when the market as a whole is hit. They are less volatile, however, than smaller growth companies.
Blue-chip stocks should be part of your long-term investment strategy. Over the long-term, you are likely to see stable returns. As part of a portfolio diversified, blue-chip stocks and lower-risk investments such as bonds can be included.
Blue-chip stocks are a better investment for investors with low risk appetites. You want to make a decent profit without risking all of your money. Blue-chip stocks may not grow exponentially, but you can invest with more confidence.
It’s important to do your research before purchasing any blue-chip stocks, despite the fact that they are often touted as being safe and stable. Don’t invest in a business because someone has recommended it. Do your own research and don’t just take someone else’s advice, no matter how good the investment appears to be.
This article was originally published on Wealth of Geeks. It has been republished by permission.
