Reasons to Invest in Blue Chip Stocks
Blue Chip is a stock recognized for features such as stable earnings, high quality, less volatility and good returns. Thanks to Oliver Gingold of Dow Jones, In the early 1920s he termed such stocks as “blue chips” as he related them with the highest denomination in poker which was $25 back then for a blue coloured chip.
Such recognition helps a naive investor differentiate between “almost garbage” & a well-established firm. A regular investor with limited financial literacy can be awestruck by the number of options to invest while looking at all the listed stocks on an exchange. Let’s look at why blue-chip stocks are famous among investors.
1. Stable Earnings
If a business has stable earnings over a consistent period of time then it becomes reliable & earns the trust of investors which is considered a real good sign of a company which has its fundamentals right. If a stock has stable earnings it clearly means that the top management of the company is doing “something right” which has led them to stability. Stable earnings mean good returns for your portfolio & that remains the primary goal for all investments.
2. Dividend Payments
A solid trend which shows that the company pays dividends to its shareholders in a timely and consistent basis is a great morale booster for a stock owner simply because it acts as a cherry on the cake. It is income over and above your capital appreciation so, for example, a 20% dividend would mean an extra 20% income over and above your investment appreciation in a particular blue-chip company.
3. Strong Financials
Blue-chip companies have strong financials, for example, they are not hugely burdened by debt, their financial ratios are intact and are seen within prescribed limits, they have an efficient operating cycle etc. This leads to less volatility, minimal risk & very limited downside risk for the investor which ultimately helps them to mitigate risk keeping the entire investment profile in view.
You might be someone who likes to take the risk; however, since blue-chip stocks are less risky they provide a great feature to help you reduce the entire risk profile so that even if you invest in more risky stocks which have a greater chance to fail blue chips can help you cover up some of your losses. These businesses usually have diversified business lines, demographics and multiple revenue channels which in turn help them reduce risk from operational failures.
5. Competitive Brand Advantage
Most of the blue-chip companies have a stronghold and their presence can be felt in daily lives of common people, for example, if you buy a can of sprite then you are adding up to the revenues of coca-cola if you buy ahead & shoulders shampoo you are adding up to the revenues of P&G. There are many such examples where it can be seen that blue chips get a competitive advantage due to their cost efficiency, franchise value, goodwill or distribution control.
These are the top 5 among various reasons to invest in blue-chip stocks.