What are Blue Chip Stocks?

Blue Chip stocks are the top leading companies listed on the ASX that are highly-reputable, stable organisations that traditionally have a long record of paying stable or rising dividends. These companies are giants, and are typically the house-hold names or market leader in their field.

In Australia they are dominated by the big financials, industrials and miners and include CSL, CBA, BHP, Westpac, NAB, ANZ, Wesfarmers, Woolworths, Transurban and Telstra. Rtio Tino, Newcrest and Woodside are also classic Blue Chip stocks.

Most Blue Chip stocks pay dividends from their profits.

Why invest in Blue Chip Stocks?

Australian investors seek out ASX Shares for 2 key reasons:

  1. Capital growth (an increasing share price)
  2. Dividends.

Traditional asset classes are equities (shares), fixed income (bonds), cash and real estate. With real estate prices in Australia at record highs, and money sitting in the bank losing value with record low interest rates, investors are increasingly looking to invest in ASX Shares.

Blue Chip shares are an alternative income stream, paying out their profits in twice yearly dividends to investors at an average of 5-6%. This dividend yield compares very favourably to term deposit rates which are currently less than 1% in Australia. There are also tax advantages in the form of franking credits.

The dividend yield is simply the $ dividend/ $share price and shows how much a company pays out in dividends each year relative to its stock price. For example, CBA has a dividend yield of 3.3%. It is currently priced at $96.1 paying a dividend of $3.15 per share.

If you had enough Blue Chip shares, you could live off the dividends which is the aim of many retirees.

Blue Chip Shares also provide capital growth when the share price rises.

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How to choose Blue Chip Stocks?

  1. Set goals for yourself, what do you want to achieve with your investments?

  2. Research the top Blue Chip stocks on the ASX that can offer more secure investments with lower risks, understand the financial statements and read the annual reports.

  3. Look at dividends and the dividend yield and remember to check previous years’ payments too so you know the company has a history of paying dividends.

  4. Choose companies carefully. Blue Chips tend to offer stable dividends and a minimal level of risk, but all companies have stock specific risks. Look into:

    1. Price to Book Ratio: Check the company is not expensive. You are simply looking at the share price divided by the net assets per share. This methodology comes up with the same result as the simple PE or price earnings ratio, but is preferred because it is more easily comparable across industries. This involves some work because you are stripping out a lot of accounting related non-cash profits and expenses.

    2.  Strong operating profitability.Focus on cash flow return on assets because it’s similar to Return on Assets but is more focussed on cash flow. Once again strip out the non-cash accounting related effects to get back to what a company is really getting as a return from its past investments

    3. Avoid Blue Chips that are heavily reinvesting excess cash flow or free cash flow back into the business. We don’t like big “capex humps” coming up where a company is set to spend huge amounts on assets.

  5. Consider all your investment options

  6. Keep calm! Share markets fluctuate all the time and remember to look at the price chart before you buy so you know the price range each stock trades within a day/week/month/year/5 years. 

  • Set goals for yourself, what do you want to achieve with your investments?

  • Research the top Blue Chip stocks on the ASX that can offer more secure investments with lower risks, understand the financial statements and read the annual reports.

  • Look at dividends and the dividend yield and remember to check previous years’ payments too so you know the company has a history of paying dividends.

  • Choose companies carefully. Blue Chips tend to offer stable dividends and a minimal level of risk, but all companies have stock specific risks. Look into:

    1. Price to Book Ratio: Check the company is not expensive. You are simply looking at the share price divided by the net assets per share. This methodology comes up with the same result as the simple PE or price earnings ratio, but is preferred because it is more easily comparable across industries. This involves some work because you are stripping out a lot of accounting related non-cash profits and expenses.

    2.  Strong operating profitability.Focus on cash flow return on assets because it’s similar to Return on Assets but is more focussed on cash flow. Once again strip out the non-cash accounting related effects to get back to what a company is really getting as a return from its past investments

    3. Avoid Blue Chips that are heavily reinvesting excess cash flow or free cash flow back into the business. We don’t like big “capex humps” coming up where a company is set to spend huge amounts on assets.

  • Consider all your investment options

  • Keep calm! Share markets fluctuate all the time and remember to look at the price chart before you buy so you know the price range each stock trades within a day/week/month/year/5 years. 

How do I invest in Blue Chip Stocks?

When you are ready to buy a Blue Chip stock you can buy them through a stock broker or an online share trading platform.

  1. Choose a share trading platform (look at the brokerage fees that you pay every time you buy and sell a stock).
  2. Open your account. You’ll need your ID, bank details and TFN.
  3. You’ll need to fund your account when you buy shares
  4. Find the shares you want to buy. Then to place a trade you search the platform to buy your shares. You can either place a trade by the number of shares you want to buy or with a capped $ amount.
  5. If you don’t know where to start or which Blue Chip stock to buy, you can sign up for our free access subscription and get started now. We have done all the hard work for you and have selected the top 40 Blue Chip shares to own. You can also follow our portfolio to see how to set up a balanced portfolio.

Are Blue Chip Stocks safe?

With our Blue Chip Value Report our focus is all about investing for the long-term. We look in depth at company balance sheets because we know that growth needs to be underpinned by solid foundations. Income is important, but the balance sheet is where value is ultimately derived.

Blue Chips generally provide stable income because they are established businesses that are not looking for high growth but for consistency. Size is not everything! Sustainable yield is the key. Our Blue Chip Value Portfolio’s yield is close to 5%, well above the average for the benchmark S&P/ASX 200 Index.

Moreover, it’s clear that value is surging. Our Blue Chip Value Portfolio is heavily invested in banks, which have returned over 60% in the past 12 months. Investors are paying more attention to fundamentals and sustainable yield. Our other twin pillar is our investment in the big diversified resource companies, BHP and Rio Tinto (RIO). We’re well in front here too.

There is no such thing as a 100% guaranteed investment. But our Blue Chip Value Report guarantees that we know what value looks like and we can show you where to find it.

In Australia term deposit rates are less than 1% meaning your money is losing value over time as it is not currently keeping up with inflation.

Because of low interest rates, and an overheated property market, more Australians than ever are investing in ASX Blue Chip stocks.

Which Blue Chip bank share should I buy?

We go into this in more detail in our blog. (LINK)

To get you started, the Commonwealth Bank (CBA) and Westpac (WBC) are more retail focused than National Australia Bank (NAB) and ANZ Bank (ANZ), which have a bigger corporate book. Why is this important? It means that CBA and WBC have less volatility in their earnings because mortgage business is stickier. An important consideration is that CBA is attacking business banking, which has been NAB’s strength. NAB and WBC also got hammered by the 2018 Hayne Royal Commission into financial services.

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In our Blue Chip portfolio, it’s a regional bank that comes up trumps, Bendigo & Adelaide Bank (BEN). CBA and Macquarie Bank (MGL) look the most expensive, while ANZ, NAB and Westpac (WBC) look fairly valued.

We like the momentum that the banks have. We also like the franchise strength of the big banks. We have benefited from their run and are holding on. If you are looking for exposure to the sector, consider BEN, but you can’t go past the big four – WBC, CBA, ANZ, WBC.

To find out which bank offers the best value and that we recommend to buy this week, take out a free access subscription now.

Best Blue Chip Stocks list 2021?

Pick Blue Chip Stocks to buy on the basis of strong fundamentals – balance sheet, cash flow, profit growth. You need to know that they offer good value, produce reliable dividends and fit into the overall diversified risk profile.

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We prefer the big blue chip stocks that are value orientated. This means that they are often not the flavour of the month. They give you income and they are not expensive. This maximises the return in the short term (dividends) and reduces market risk (of widespread selling).

Dividend income on average is giving you 4.5% a year which compares very favourably with term deposits. Most “value stocks” or those that are trading on low earnings multiples, are likely to have higher dividend payout ratios than Small Cap growth stocks. These Blue Chip value stocks give you more security in times when the overall market is under pressure. There are some value stocks that pay high dividends and some that don’t, but if your portfolio is skewed towards companies with strong balance sheets, solid cash flow and are paying consistent dividends, you should ride out the share market volatility with positive returns.

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You need to access up to date research to find out which stocks to buy now, and we would encourage you to take out a free access subscription now to see which is our latest Blue Chip stock recommendations.

In 2020 during Covid, we were advising subscribers to buy the big value stocks at very cheap prices. Blue Chip stocks like CommBank, Westpac, ANZ, Tesltra, Rio Tinto, BHP and AGL Energy.

2021 Current economic outlook.
Sentiment has changed in 2021 with the Covid vaccine and the economy picking up again. Importantly the RBA Governor Philip Lowe has been resetting expectations for the outlook around interest rates. There had been big concerns about inflation and that official interest rates might need to be hiked later this year. He has now made it clear that this won’t happen in the foreseeable future. For the banks this is good news. The cost of credit (borrowing) will remain low for an extended period. This also benefits households and business. The prospect of interest rates remaining low also offsets the removal of JobKeeper at the end of this month.

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What does the current economic outlook mean for buying shares? In 2021 we are now seeing opportunities in manufacturing, services and mining. If you would like to get in depth independent analysis and easy to understand buy recommendations access our free trial subscription now.