Why should investors have a blue-chip stock in their portfolio?

Summary

• Blue-chip stocks represent well-established, financially sound companies with a high reputation and reliability, often paying attractive dividends to investors.
• Moreover, blue-chip stocks have dependable earnings and market capitalisation.
• Over the recent years, if one carefully looks at the investment trends, it becomes clear that investment in blue-chip companies has emerged as the preferred investment option among the investors.

When investing in stocks, investors have varied options from various asset classes before them. It often becomes difficult for an investor to decide where to invest. However, over the recent years, if one carefully looks at the investment trends, it becomes clear that investment in blue-chip companies has emerged as the preferred investment option among the investors.

So, today, let's deep dive to understand blue-chip companies and how investment in blue-chip stocks can help investors get the desired result from their investments.

What are blue-chip stocks?

Blue-chip stocks refer to the stocks issued by well-established, financially sound companies with a high reputation and reliability, often paying attractive dividends to investors. Blue-chip stocks have dependable earnings and market capitalisation. Besides, a blue-chip stock is usually among the three stock companies in its sector. Some examples of blue-chip stocks can be Apple Inc. (NASDAQ:AAPL), and Microsoft. 

What to consider while investing in Blue Chip Stocks?

As we know, investors, while making any investments in stocks, securities or bonds, focus on the returns and the risk involved in a specific investment. The returns from investments can mainly be in the form of dividends and interest payments.

It is to be noted that most blue chips have long records of paying stable and rising dividends. Usually, one can find blue-chip stocks listed on most reputable stock market indexes like the Standard & Poor's (S&P) 500, Nasdaq-100 in the US, Dow Jones Industrial Average, also known as the Dow 30, or the TSX-60 in Canada.

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However, blue-chip stocks should not be perceived as an all-time-safe investment as there can be exceptional situations such as the financial crisis of 2008 and the bankruptcy of Lehman Brothers. That is why it is suggested to use blue-chip stocks as core holdings within a more extensive portfolio and not as the entire portfolio. 

Reasons why one should invest in blue-chip stocks

1. Blue-chip stocks pay stable and timely dividends: Because blue-chip shares are usually mature companies with large market caps, most of them pay dividends. A dividend is a part of the company's profits shared with shareholders as quarterly payments. Unlike smaller companies, a blue-chip stock offers steady and increased dividends over time. Thus, irrespective of the daily fluctuations in the share price, the advantage to an investor investing in blue-chip stocks from dividend payment is portfolio income.
2. Protection against inflation: The dividends paid by these companies represent earnings or income to a shareholder. During inflation, with an increase in the cost of living, there is also an increase in earnings; thus, dividend payment also offers protection against the side effects of inflation.
3. Blue-chip stocks provide a sense of security: Since the blue-chip stock companies have a solid balance sheet, proven business record, regular cash flow, and history of attractive dividends, they are considered the most secure stock investments. Given their strong financial position, blue-chip stocks are less volatile and are the first to rebound whenever there is an improvement in the market conditions.
4. Creditworthiness and trustworthiness: Since blue-chip companies are financially sound, they possess adequate capital to clear their financial dues and obligations quickly. Thus, the shares issued by these companies are highly credible.

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5. Blue-chip companies facilitate corpus building and portfolio diversification.
6. Low volatility: Since blue-chip companies are mainly big corporations, they generate revenue streams from multiple products and services. Though blue-chip stocks are not immune to economic downfalls, they are not easily affected whenever there is an unfavourable economic situation or volatility in the market.
7. Low Risk: Since reputed high-quality companies issue blue-chip stocks, they are usually considered low-risk investments.