How to Pick Blue Chip Stocks
A "blue chip" stock is the stock of a company that is thought to be financially in good standing, pays dividends and has a long standing reputation among investors or the overall market as performing in a "safe" and "profitable" manner. Here are some tips on how to pick "Blue Chip" stocks.
- Difficulty:
- Moderate
Instructions
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Look for a low price to earnings ratio. The "P/E" as it's otherwise known is the ratio of the price of the stock versus the earnings per share of the stock. The lower the "P/E" the better. Many Blue chip companies have "matured" in their market cycle, meaning that their growth has slowed, but the earnings are reliable. A company example would be Coca-Cola. They have a slower growth rate than some Internet start-up, but they are ever expanding as the world population is growing. A great "P/E" is 10.
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Check for the growth rate of the company. While you do not want the risk of some Internet start-up company, the growth of the company is exceedingly important. The "YOY" or year over year growth of the company is measured in percentages. The higher the percentage the better. Most Blue Chip companies have slowed when it comes to growth. However, the important measure is that they continue to grow on a predictable basis. Companies that service the world population are great candidates for Blue Chip stocks.
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Search for dividends. Most Blue Chip companies will pay a dividend, which is a payment to the investor for each share that they own. It is "thank you" for investing in the company and a guaranteed return on investment. It is usually paid quarterly. Most Blue Chip companies pay a dividend; the higher the dividend, the more money you make while waiting for the stock to appreciate.
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Diversify your investment portfolio. Even though you are investing in time-tested companies, it's smart not to load up on companies in the same sector. Diversification will protect your portfolio in case of a sector or market downturn. An example would be that you would not want to own Hershey (HSY) and Tootsie Roll (TR). While both have long standing reputations, they are both candy makers.
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Tips & Warnings
The stock market does offer risk. There is no guarantee of return. Seek the advice of an investment professional before investing.
