While investing in the stock market, we know that there are many companies available to choose from. To make the stock selection process systematic and organized, investors look at companies in two major classifications.
Investors can choose stocks on the basis of which industry, for example, technology, energy, or financial. These industries are represented by sectors in the stock market and there are eleven major sectors to choose from. Choosing stocks from different sectors enable investors to diversify their portfolios.
Further, the stock market is divided on the basis of the size and revenue generated by the company. Large-cap companies are often financially powerful and well-established in the market, and small-cap companies are very young which means the stocks have a high potential for growth and in terms of absolute returns.
What are blue-chip stocks?
There are companies whose stocks have a sound business model that generates stable cash flows and pays dividends consistently. These are known as blue-chip companies. According to Investopedia, blue-chips are companies that are well-established, reputed, and financially sound. Blue-chip stocks don’t necessarily mean stocks with a high price tag but are quality stocks that have stood the test of time.
There are certain features that can help you to classify companies as blue chip:
- Blue-chip companies are well-known, well-established, and well-capitalized.
- These companies have been in the market for several decades now and an early investment in the company may have resulted in tremendous investment growth.
- They are less volatile and more stable in the market.
- During an economic downturn, they perform comparatively well and mostly recover along with the market.
Why Should You Invest in a Blue-Chip Stock?
Similar to small-cap, mid-cap, and large-cap stocks, there are several reasons why some percentage of your portfolio should contain blue-chip stocks.
According to TheStreet, investors look at blue-chip stocks, mainly for the stability it offers. These companies have generated solid earrings over a period of time and so they project a similar trend in returns.
Another benefit that investors enjoy due to stable returns is that even during a market crash blue-chips tend to retain their performance and even if they get affected, they recover in no time.
Moreover, most blue-chip companies pay regular dividends to investors. Dividends are a part of the company’s profits which are issued as a thank you note to investors for withholding their stocks.
Dividend-paying stocks often indicate that the company is in a comfortable position financially. Investors benefit from dividends as they provide an alternate or passive source of income.
The stable returns and regular dividend payments boost an investor’s morale as in addition to the timely stock appreciation, investors receive an additional payment, that can create massive wealth over time.
Blue-chip stocks help to diversify your portfolio as the risk involved while investing in them is significantly lower. To invest in a blue ship stock, you should invest consistently over time and focus on dollar-cost averaging.
As it is impossible to time the market, you need to keep aside a certain amount each month to invest in market leaders. While buying these stocks, you should keep the ‘buy great companies at a good price’ strategy in your mind.
You should note that investing in blue-chip stocks also has its cons. They don’t provide market-thumping returns but rather generate stable returns which may not be very attractive for young investors.
What are some Canadian blue-chip stocks on the TSX?
- Royal Bank of Canada
Royal Bank (TSX:RY) is one of the most popular stock options in Canada. The company has a market capitalization of close to $140 billion and offers a strong 4.61% dividend yield. According to Stocktrades, the Canadian banking industry is one of the strongest sectors in the country.
During the 2008 financial crisis, when banks around the world were slashing dividends and closing their doors, Canadian banks stood strong. RY stock experienced a decline in share prices but did not cut dividends, allowing the stock to recover swiftly.
Many Canadian banks fall under the blue-chip stock category.
Fortis (TSX:FTS) is a utility company with operations in Canada, Central America, the U.S., and the Caribbean. According to dividendearner, the US accounts for about 60% of Fortis’ business while Canada constitutes the remaining 40%. It provides investors with a 3.6 % dividend yield and is known for its highly regulated, low risk, and diversified utility businesses.
Bell Canada Enterprises (TSX:BCE) is the largest telecommunication company in Canada. The company and has a customer base of 9 million subscribers and a market cap of around $50 billion. BCE stock is one of the best income stocks in the country, with a dividend yield of approximately 6%.