The term “blue chip” comes from the game of poker, where a blue chip is considered of the highest value. Similarly, blue-chip stocks hold high value and are excellent long term investment vehicles. These stocks belong to well-established companies and have depicted growth in long-term portfolios. In the long run, blue-chip stocks hold various benefits. Few of them are:
- On-time Payment of Dividends: This factor decides the company’s blue-chip status. If the payments of dividends are consistent, there is an additional income above the initial investment. Extra benefits of the dividend are enjoyed by the investors when they invest a substantial amount in a blue-chip company. For example, if the investor receives a dividend of 25 % on their investment, it means the capital has increased by 25%.
- Consistent Returns: A company providing a constant inflow of earnings is likely to earn the trust of its investor. It implies that the company has strong fundamentals and is working hard to maintain its earning capability. The stable earning of blue-chip stocks are considered good for an investor’s portfolio. It also provides suitable returns making the investment worthwhile.
- Goodwill and Brand Value: Blue-chip companies are present in everyday lives, in the means of products or services which are trusted and used regularly. Such companies always have an edge over other emerging companies. With the use of easy franchise availability, distribution advantage, and cost efficiency, they have established themselves as market leaders. Some famous blue-chip companies are Reliance Industries, Infosys, and Unilever.
- Financially Sound: Blue-chip companies enjoy a healthy and well-known financial base. This means that such companies maintain a favourable debt-equity ratio, lower volatility, minimal risks, efficient operating structure, and controlled risk portfolio.
- Risk Diversification: For investors who aren’t risk-averse, it is best for them to have some blue-chip company stocks in their portfolio as they are known for their stability. Even when an investor invests in a risky blue-chip stock, the investor still has an advantage of minimising losses as these companies are known for their operational efficiency. Blue-chip companies have a wide range of revenue channels, a substantial demographic base, and diversified business interests. Due to these reasons, the risks that an investor can incur are moderated.
Blue-chip companies are usually big names and often feature in the Fortune 500 list. The reasons mentioned above are some reasons to invest in blue-chip stocks. Blue-chip stocks are usually family heirlooms which can give substantial returns as long as an investor holds on to them.