Is Investing In Blue-chip Equities A Good Retirement Strategy?

Summary

• Market experts opine that blue chip stocks can be less volatile relative to smaller growth companies and could be one of the firsts to rebound when markets eventually recover
• Blue chips are an excellent way to achieve long-term financial goals as they offer stable investment returns, allows one to grow their capital and build a large corpus
• Retirees have lower risk appetite and multiple advantages of blue chip investments seem to fit well in their portfolios across cycles

When one ponders about blue chip companies, the image that comes in mind is of tried and true, large companies with entrenched businesses. Businesses that have robust cash flows, healthy financials, and a reliable stock investing in which holds high possibilities of letting investors sleep peacefully at night, knowing that short-term spins will not cause much harm.

Of every genre of investors, the ones aiming to build a retirement portfolio connect most well with few aspects that blue chip companies offer the best- stable financial record and credibility, attractive dividend pay-outs, ability to cushions impact of recession, inflation and economic stagnation, to tag a few.

Recapping before we proceed- companies with a large market capitalisation are termed as blue-chip companies. They enjoy great market repute, and shares issued by them are highly valued in the market. These companies are governed by a very strong management team and demonstrate consistent results over a long period of time.

Classic examples include Facebook, Berkshire Hathaway, Alibaba Group Holding, Johnson & Johnson and Novartis.

Why Do Investors Like Blue Chip Stocks?

Blue-chip stocks are considered to be an attractive investment option for accomplishing long-term financial goals.

First and foremost, the fact that blue-chip companies are well-established serves as a safe investment avenue for most investors. Earning steady, guaranteed returns is hence a cumulative boon.

Secondly, these companies ideally have enough capital to clear their financial dues and obligations effortlessly and timely. Shares issued with high creditworthiness, is a cumulative boon of this aspect.

Thirdly, risks factor associated with blue-chip companies is comparatively less owing to their stable financial performance.

Blue Chips for Retirement?

Blue chip stocks have long reigned supreme in the investment portfolios of retirees, non-profit foundations, and capitalist class investors. Focusing on why investors choose to diversify their retirement portfolios with blue chips, the key season remains the classic one- blue-chip stocks tend to pay reliable, growing dividends. It is a globally believed fact that investing in blue chip stocks that pay dividends is a cornerstone to building wealth.

Moreover, the dividend payments offered are real cash which can be used as passive income for day to day living expenses once one retires. Or, it can be reinvested to produce more dividends in the future. Not to forget, most blue chips usually increase their dividend payments every year (dividend growth stocks). This helps the retiree’s income keep up with inflation.

Besides this, blue chips are one of the most trusted investment avenues in the overseas market. For instance, many US-based blue chip companies have significant amounts of business in foreign countries. This offers global diversification without the need to put investment dollars in non-US based concerns.

There is another reason why retirement portfolios like blue chips to be a dominant constituent in them- low risk. Retirees, unlike other investors, choose to take less risk, and blue chips are probably their safe haven as these companies have little chance of going out of business even during an economic downturn (though returns might get affected).

Blue Chips & Retirees Amid COVID-19

There is renewed focus on income-generating assets as retirees opine that the unprecedented COVID-19 crisis has slashed their income. For instance, in Australia, some have even reportedly called on the Fed Government to contemplate necessary changes in age pension, Commonwealth Seniors Health Card and likewise measures. It is no surprise that owing to the pandemic and its repercussions, retirees are on a lookout for stronger returns (in different asset classes).

According to a Forbes report, pandemic prices are not a reflection of intrinsic value, given the dynamic nature of the virus and market reacting to it differently each day. “This too shall pass, and price will recover” while blue chips have the closest possibility to weather the pandemic storm.

The Forbes report also emphasises that if a blue chip seems fundamentally right but is currently down because market participants chose to sell it indiscriminately out of panic, there is no reason to sell.

Bottomline

It should be noted that even when blue chip stocks demonstrate strong balance sheets, constant cash flows, proven business models, and a history of growing dividends, they are not immune from losses if the broader stock market enters a bearish phase. But, they sure can be deemed to be among the most secure stock investments owing to watch-worthy track records and performance history.

In closing, we would leave with you with thought-

The pandemic is not yet over. Economies are struggling to be up and running. The market has been in a bubble sporadically with corrections not necessarily imminent. Risk factors remain high. Amid these facts, people continue to invest and prep themselves for a safe and secure retirement. Therefore, one should trust the quality and risk-management ability of their portfolio to continue generating income while we tackle the invisible enemy or any future recessions.

Meanwhile, blue chips seem to be hot stocks in times of turmoil, run by competent management, flagging strong balance sheets, and guaranteeing if not soared, but stable returns.

ALSO READ- Blue-chip stocks: Value versus Growth in Covid-19 Era