Monday 13 April 2020

Benefits of the Bluechip stocks

WHAT ARE THE BENEFITS OF BLUE CHIP STOCKS?




Blue chip stocks are shares of large, established, and financially stable companies that have been around for a long time. The term " blue chip" comes from the game of poker where blue chip holds the highest value.

Blue chip stocks stability 

Most investors understand that blue chip stocks have stable earnings. During an economic downturn, investors mat turn to these perceived " safe havens" because of their steady nature. Some people believe that blue chip companies can offer security during periods of slower growth due to their experienced executive teams combined with their ability to generate stable profits.

A blue chip stock is typically large in size ( with market capitalization in the billions) and a leader in its sector or industry. The company is usually a familiar and easily recognizable name, which gives investors a sense if added confidence when adding the stock to their portfolios. That's because, if stocks fall into a bear market, these well established popular names will likely be among the first to recover. There is little risk that they will go out of business during an economic downturn.

Blue chip and Dividends

Since blue chip shares are typically mature companies that have achieved large market caps, most pay dividends. Dividends represent a portion of the company's profits  that are distributed to shareholders in the form if quarterly payments. Smaller companies that are growing fast typically retain all of their earnings in order to invest in future growth. These growth stocks may eventually pay dividends once they are of sufficient size and begun to see fewer opportunities to invest in themselves.  At that point, they begin distributing excess earnings to their shareholders. Until then, a fast growing or young company is not likely to pay any dividends.

A blue chip stock, on the other hand, has seen increased and uninterrupted dividends over time. In the long run, the benefits to the shareholder from the dividend payments is portfolio income, regardless of the daily swings in the share price. Dividend payments can also help to protect against the adverse  effects of inflation because dividends represents earnings, which can increase along with the general cost of living.

The Bottom Line

Blue chip stocks typically have solid balance sheets, steady cash flows, proven business models, and a history of increasing dividends. For the reason,  investors generally consider blue chip stocks to be among the most secure stock investment because of their track record and performance history. So, while blue chip are not immune from losses if the broader stock market enters a bearish phase, the idea is that these names will be less volatile than smaller growth companies and will also be the first to rebound when the market eventually recovers.

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