An investment in blue-chip stocks is popular for being boring, stodgy, and even outdated. Yet, wealthy investors and rock-valid financial institutions still highly prefer them.
Most of the time blue-chip stocks is taken for granted. But it has long reigned supreme in the investment portfolios of retires and non-profit foundations.
Defining blue-chip stocks
The name is given to company common stock with several quantitative and qualitative characteristics.
The name itself comes from the card game, Poker. It represents the highest and most valuable chip color. Here are the common characteristics of blue-chip stocks/companies.
Stable earning power
In several decades, it has an established record of stable earning power.
Boast the dividend
It boasts an equally long record of uninterrupted dividend payments to its common stakeholders.
Rewards
It rewards its shareholders by growing the dividend at a rate equal to or substantially more than the rate of inflation. Thus, the shareholders’ income is increasing at least every twelve months even if he or she never buy another share.
High return on Capital
It provides a high return on capital, especially as measured by return on equity.
Solid balance sheet and income statement
It sports a rock-solid balance sheet and income statement. Especially, when measured by things such as the interest coverage ratio, the geographic and product line diversity of the cash flows.
Also read: Stocks Trading 101: Use Ticker Symbol to Identify Stocks
Why is it popular with wealthy investors?
The reason why wealthy investors love blue-chip stocks is that they tend to compound at acceptable rates of return, between 8% to 12%, decade after decade.
Besides, holding the stocks directly means allowing enormous deferred tax liabilities to grow. Thus, the wealthy can die with the individual stocks still in their estate, passing them to their children using something known as the stepped-up basis loophole.
