Blue Chip stocks: 7 reasons to have in your portfolio

by Ben Wane Consultant

What are Blue Chip Stocks or Companies?

BlueChip Stocks are market stocks that are highly-priced. It has now emerged as an investment option over the past years. The companies that issue such type of stock are highly esteemed, with stable financial records and credibility. These companies provide attractive dividend pay-outs that gain the popularity of these stocks. There are few details that every investor should know before investing in the blue-chip.

Blue-chip stocks are issued by companies that have a large market capitalization and they are known as Blue chip companies. Companies that issue these types of shares have a great reputation and are well-established.

Features of Blue-Chip Stocks

The features of Blue-Chip Stocks are listed below:

· Credit-worthiness: There is enough capital with Blue-chip companies that is sufficient for clearing all obligations and financial dues easily. This factor makes the creditworthiness of such companies high and the risk of default is low.

· Risk Factor: Big companies are financially stable so the risk factor is comparatively low. The small amount of risk can further be reduced by diversifying your investment portfolio of blue-chip shares.

· Growth Prospect: Blue-chip companies are large companies that have attained a level where the growth potential is maximum. Blue Chip shares grow slowly and steadily over time.

· Investment Horizon: For investing in these shares the term of investment is over 7 years. Such a long period of investment makes it a good option for achieving long-term financial goals.

· Taxation: The gains that can be obtained via blue-chip shares come under Section 80 C of the Income Tax Act that does the treatment of it as Income. The tax rate for short-term capital gains is 15%. Additionally, the long-term capital gains that exceed the amount of Rs. 1 lakh have a tax rate of 10%.

· Assured Returns: Blue-chip stock’s returns are generated quarterly as dividends. Additionally, the fact that these are well-established companies serves the investment as a safe one for the investor. The returns are steady and guaranteed so the clients are kind of relieved and less afraid of any frauds.

Reasons to Have Them in Your Portfolio

Here are 7 Reasons why you should have Blue-chip stocks in your portfolio. Those are:

· Timely Payments of Dividend: There is a trend of these companies that they consistently provide timely dividends. Additionally, this is because the income of these companies increases with capital appreciation. Also due to this reason Blue chips are termed as the best form of investment.

· The Aspect of Strong Financials: The company is backed by strong financials so the debt-equity ratio is ideal. In addition to that, the financial ratios are great with an efficient operating cycle. Moreover, the low volatility, minimal risk, and mitigation of risk portfolio make this attractive for the investor.

· Goodwill and Brand: Blue-chip companies have a good reputation and goodwill among households. Moreover, there is a competitive advantage over new companies or any incompetent competitors. The cost efficiency, distribution control, etc make these companies become market leaders. Some of the well-known blue-chip companies are McDonald’s, Reliance Petroleum, Infosys, Nestle, P&G, etc are on the Fortune 500 companies’ list.

· Stable Earnings: You earn a stable dividend income via blue chips if the business is doing great. The trust of investors is earned by the company as they provide stable earnings to investors, shareholders, stakeholders, and employees.

· Diversification: Diversification is a great move to reduce the risk of your portfolio. These companies minimize the risk of losses as they are backed with excellent operational efficiency. Blue-chip business diversification of demographics, generating channels, business lines, etc can be a blessing.

· Liquidity and Ease of Access: As these stocks are popular the liquidity is high and they are easy to sell/buy. Moreover, you will appreciate this benefit of liquidity when you have already known the pains of selling an unpopular stock. It is a frustrating job to offload a less popular investment as the value starts to fall or when you want to let go of some of your equity. Blue-chip stocks are the most liquid investment as you can trade them in moments with the help of online platforms, various brokers, or fund managers.

· Availability of Investment Options: There are a variety of ways in which investors can access these stocks. You can buy it directly or through ETFs or Investment funds. Additionally, you can choose from many investment options, that also includes UK-based companies, American or Korean Exchange. The benefits of ETF are that they have minimal transaction fees and can help to diversify your portfolio easily to cut costs.

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How to identify the best fit Blue-chip stocks for your investment portfolio?

Many mutual funds and investors that are experienced prefer Blue chip stocks due to their impressive track record and dominance. Some of the factors to consider while choosing the best Blue-chip stocks are as follows-

· Size: The value is indicated by the size of the company or market capitalization. Market capitalization is calculated by multiplying the number of shares with the current market price.

· Company Revenue: When you identify the big companies you need to check the revenue or income. The companies you would want to invest in should have a larger market share.

· ROE: Return on Equity helps to identify higher profitability companies against shareholders' equity.

· ROA: Return on Assets helps to identify assets effectively in order to generate profit.

· Valuation of the Company:A company’s valuation is not the same as market capitalization. It is based on factors like demand, supply, etc. Pay close attention to intrinsic value instead of the market price.

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Conclusion

Blue-chip stocks have many benefits as compared to equity stocks. You should always do proper analysis before investing. There are many reasons to invest in them as they are trusted business models, have increasing dividends, steady cash flows, etc. They are considered a safe haven due to their strong performance, seasoned investors, and excellent track records. You should also consider the features of these stocks to know them better. Choose wisely and invest smartly.