A Guide on Investing in Blue-Chip Companies

2021-05-01     thesmartinvestor
A Guide on Investing in Blue-Chip Companies

If you are just starting on your investment journey, you should take a look at our beginner’s guide to investing.

Investing covers a wide range of topics.

In addition, there is a vast array of companies to choose from.

Income-seeking investors who practice dividend investing may prefer to invest in real estate investment trusts, or REITs, for their stable and dependable dividends.

More growth-oriented investors may look for companies that report consistent revenue and net profit increases.

If you’re looking for peace of mind and steady, consistent growth, you may wish to consider investing some money into blue-chip companies.

What are blue-chip companies?

If you are wondering what “blue-chip” means, you need to go back to 1923.

Back then, poker players used to bet with blue, white and red chips with the blue ones having the highest value.

The name then stuck as the term “blue-chip” is now synonymous with quality.

Blue-chip companies don’t refer to stocks with a high price but signify businesses with a long track record that have stood the test of time.

Benefits of blue-chip businesses

There are many benefits associated with blue-chip companies.

For one, they are well-recognised and reputable names that are typically trusted and respected.

Having gone through numerous economic cycles, these businesses have also built up a track record of resilience.

Owning a blue-chip company means you can sleep well at night knowing that it’s a well-run business staffed by a capable and competent management team.

In short, blue-chips offer stability and peace of mind for investors who may be worried about investing in smaller, untested companies.

Examples of blue-chip companies

It’s easy to spot blue-chip companies as they are usually part of an index.

An index consists of a collection of companies that are used as a barometer to track the overall market.

These companies are supposed to represent a section of the wider economy and are usually from a variety of sectors such as banking, telecommunications, commodities, property and consumer goods.

In Singapore, the benchmark index is known as the Straits Times Index (SGX: ^STI), or STI.

The STI is made up of the top 30 companies listed on the Singapore Stock Exchange.

Some of the blue-chip companies within the STI include DBS Group (SGX: D05), CapitaLand Limited (SGX: C31), Singtel (SGX: Z74), Singapore Airlines Limited (SGX: C6L) and ST Engineering (SGX: S63).

In the US, which has three major indices, examples of blue-chip companies include Apple (NASDAQ: AAPL), Johnson and Johnson (NYSE: JNJ), Visa Inc (NYSE: V), Nike (NYSE: NKE) and Amazon.com (NASDAQ: AMZN).

Watch out for the risks

Despite the strong reputation that blue-chip businesses have, investors need to remember that they are still subject to the same economic forces as other, smaller businesses.

No matter how large or reputable a blue-chip business is, there will still be risks associated with it.

These include the effects of competition, technological disruption and product obsolescence, to name a few.

If you plan to invest in a blue-chip company, you need to be mindful of the risks related to the company’s business and industry.

There have been many documented instances of blue-chip companies facing deteriorating fortunes because of an inability to innovate or adapt to changing business conditions.

Some, such as Eastman Kodak (NYSE: KODK), have suffered steady, long term decline, eventually losing their vaunted blue-chip status.

Get Smart: Blue-chips are solid but remember to monitor the business

Blue-chip companies are a good place to start your investment journey.

The stability and long track record of such businesses offer peace of mind and certainty.

Many blue-chip businesses also offer a great mix of both dividends and growth.

However, investors need to be wary of the risks as well.

Blue-chip companies can fall on hard times, as shown by this pandemic.

Some may stumble and face terminal decline, while others may end up hobbling along for many years without enjoying any recovery.

Thus, you need to assess and monitor the business closely.

Blue-chip companies may offer a better chance of succeeding in a cutthroat business world, but in investing, there are no guarantees.

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Disclaimer: Royston Yang owns shares of DBS Group, Apple, Visa and Nike.

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