While there’s always risks in sharemarket investing, the quality of blue chips dramatically reduces them. By Nick Radge.
“Blue chips” are companies of high quality and stature, often regarded as fairly safe investments. For those new to the sharemarket, they can be a good category to start an equities portfolio.
Usually these companies are extremely popular brand names that almost every citizen can relate to, whether they're a share investor or not. The S&P/ASX 20 index is commonly regarded as Australia’s blue-chip index, comprised of the 20 largest stocks on the market.
Blue-chip companies, such as BHP Billiton and Telstra, offer numerous benefits to their shareholders, including:
- long-term stability with strong financials, balance sheet and credit rating
- being a well-established name brand used by a large proportion of the population
- an historically strong earnings growth
- a long record of paying dividends with regular increases
- a reasonable share price growth and lower volatility.
Blue-chip stocks in Australia have been a boon for retail investors for several decades as almost all offer a high-dividend income which grows consistently. Indeed, Australia has some of the highest-dividend yields in the Western world which has become even more important in recent years with global interest rates declining to historically low levels.
While there are always risks involved with sharemarket investing, the quality of blue chips dramatically reduces the risks of investing in a company that may go bankrupt. In effect, investing in these types of companies is like investing in a super-charged bank account.
The key to successfully investing in these companies is to take a long-term approach and understand that share prices do fluctuate. When blue-chip companies decline in price during difficult economic periods, such as the global financial crisis, an astute investor will not panic and sell. Rather, the share-price weakness allows additional investments to be made at lower prices and investors can position themselves for the expected economic recovery.
Nick Radge is head of research and trading at The Chartist (www.thechartist.com.au)
AFSL 288 200