Blue chips: big and dominant not good enough

In times of uncertainty, many investors look for equity investments that represent stability and safety.

In times of uncertainty, many investors look for equity investments that represent stability and safety. Certainly one place to look is at the so-called “blue-chip” stocks.

What is a blue chip today?

Just being big and dominant is no longer a guarantee that a company is blue chip quality. A blue chip today is most often found in the mature investment sectors, such as banking, insurance, and the equities of large-cap, industrial sector giants.

Their shared attributes are investment stability, the quality of their tangible assets and value, their long and predictable revenue and earnings track record, and competitive dominance in their respective markets. Such companies can usually show a long record of increasing dividend payouts and a reputation for dependable management practices. Most blue chip investments are leaders in their industry, and their products and services often possess wide “brand” recognition.

Homework is required

Blue chips tend to maintain value in both good and bad markets, and can be an attractive way to achieve a higher level of safety in a portfolio’s equity component. But homework is required. While size, history and reputation are good guides to blue chips, they do not guarantee future performance. There could be any number of reasons for a blue chip to “lose its edge.” It is important that proper analysis be undertaken not only when selecting blue chip investments, but also when deciding if and when to move from one to another.

Understand value

Blue chips are rarely the most popular choice for growth investors seeking high returns in a short period of time. But they do often possess understated value that can make them a superior investment over time.

One of the chief advantages of blue chips is their dual investment value. As equities, their share price appreciates with earnings growth, and there is generally a dividend. Over the long term, the combination of gradual stock price appreciation and regular dividend income can give blue chips an attractive long-term rate of return.

— For more on how blue chips might fit into your portfolio, feel free to contact me at (250) 752-6010 or email jim.grant@raymondjames.ca. Jim Grant CFP, CIM (Chartered Investment Manager) is a Financial Advisor with Raymond James Ltd. (RJL) His views do not necessarily reflect those of RJL. This article is for information only.  Raymond James Ltd., member-Canadian Investor Protection Fund.

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