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Boring But Steady - Investing in Blue Chip Stocks| Economics Global

Investing in conservative blue chip stocks may not have the allure of a hot high-tech investment, but it can be highly rewarding nonetheless, as good quality stocks have outperformed other investment classes over time.

Investing in conservative blue chip stocks may not have the allure of a hot high-tech growth investment, but it can be highly rewarding nonetheless, as good quality stocks have outperformed other investment classes over time.

Historically, investing in stocks has generated a return of approximately 11%-15% annually, depending how aggressive of an investor you are. Equities tend to outperform other investments since they incur more risk, as equity investors are at the bottom of the corporate “food chain.” First, companies have to pay their employees and suppliers, followed by their creditors and bondholders, and then with their preferred shareholders following shortly thereafter. Companies have an obligation to pay all these stakeholders first, and if there is money leftover, common shareholders will receive the rest through dividends or retained earnings. In some instances, there is a lot of money left over for common shareholders to receive, while in others, there isn’t. Thus, investing in equities is risky business, because investors never know exactly what they are going to receive for their investment.

Nonetheless, despite these risks from investing in equities, blue chip stocks do provide equity investors with some sort of stability. In fact, some attributes that make blue chip stocks appealing for conservative investors include the following:

1. Investors understand that blue chip stocks have steady earnings and earnings growth. During a recession, equity investors tend to view blue chip stocks as “safe havens” because of their stable nature. 

2. Since blue chip stocks are typically that of mature companies with large market caps, many pay dividends to their shareholders. In the long run, the benefit you receive from dividend payments is portfolio income, regardless of the daily fluctuations in the markets. Dividend payments can also help you to protect against the negative effects of inflation, because dividends represent earnings which can increase along with the long-term GDP growth rate, or at the very least, the general cost of living.

3. Blue chip stocks provide great long-term rates of return over time. One of the reasons patient investors prefer blue chip stocks is because they tend to compound at acceptable rates of return over the long run. Typically these rates of return can reach between 8%-12% with dividends reinvested. 

Just like any type of investment, there are risks associated with investing in blue chip stocks. Such risks include the following:

1. Some investors can’t tolerate both the risk associated with investing in equities, and the risk associated with investing in one company. Not all blue chips are created equally, and thus it is always recommended to ensure diversification for your portfolio, even amongst blue chip stocks. 

2. If you don’t have the time and skill to identify a good quality company at a fair price – don’t invest directly. Rather, you should consider a good mutual fund, exchange-traded fund, or qualified financial advisor.

Selecting a blue chip company is only one part of the equation – determining its fair market value is another. Theoretically, the value of a stock is the present value of all future cash flows discounted at the appropriate discount rate. However, like most theoretical answers, this becomes much more difficult when practiced in the real world. In reality, supply and demand for a stock sets the stock’s daily price, and demand for a stock will increase or decrease depending of the outlook for the company. Thus, stock prices are driven by investor expectations for a company, and the more favourable the expectations, the better the stock price, and vice versa.

In short, the stock market is a voting machine, and much of the time it is voting based on investors’ fear or greed, not on their rational assessments of value for the company. Stock prices can swing widely in the short-term, but they eventually converge to their intrinsic value over the long-term.

Investors should look at good companies with great expectations that are not yet embedded in the price of a stock. For those willing to do so, blue chip stocks are a great place to start.

Related Financial Education

For investors who are interested in other topics related to financial education, see our articles below:

Going Global – Investing in an International Landscape

Watch Out for the Dividend Trap

Finding Bargains Among Beaten Down Stocks

“Counting Your Pennies”: Dividend Investing as an Investment Strategy

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“The Trend is Your Friend” – Long-Term Investment Opportunities

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© 2020 Economics Global Inc.

Content Disclaimer
Any views expressed here are those of Economics Global Inc. as of the date of this publication, are based on available information, and are subject to change without notice. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

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