Blue chips companies are generally the market leaders or top performer in their particular sectors. They normally represent the major market indexes in each country.
If you have read my post on stock fundamentals you get some idea of what type of companies, I will invest in.
It’s not sufficient that they are the biggest and well-known companies that I will buy them. I will thoroughly investigate, read and understand their financial statements.
Which blue chip company will I invest in?
I will partner companies that continue to grow in revenues, have minimal or no debts. As a long-term investor, I am focusing on companies that gives back some of their profits to their shareholders in the form of dividends.
Therefore, I am only interested in investing securities that have proven track record of increasing earnings and dividends for at least five years. These are just a few of my criteria in choosing companies to invest in.
Once again, I am an investor with a long horizon and not a trader (buy low and sell high). I don’t need to watch the screen of my computer all day to decide when to buy and sell.
I don’t have a crystal ball and I can’t predict what will happen to the market and NO one can!
Invest regularly whether it’s weekly, bi weekly, monthly or quarterly or whenever you have funds to do it. BUY and HOLD.
Increasing my holdings in these companies during my healthy working years is my priority and main goal. By doing so, after 10, 20 or 30 years your dividend income (which is passive income) will hopefully be sufficient enough to replace your active income (salary).
Here’s where the magic works!
Aside from investing regularly, I will reinvest every time I received my dividends by buying more shares. That’s where the magic of compound interest works.
When do I sell my securities?
Only during retirement or in extreme emergency that I will sell my positions. Hence, my money is working hard for me (passive income). Not me working hard for the money (active income).
Passive income through dividends will continue to roll in, with very minimal effort on your part or even when you are sleeping. The good thing about dividends is that you know exactly how much income you will receive, either it’s monthly, quarterly or on an annual basis.
If you say buy and hold, is it safe to say that I will no longer study my equity holdings?
As an investor exercising due diligence is an integral aspect. At times some of these companies will also encounter problems and struggle financially. They may also will be affected during difficult economic times.
Since you have already set your own criteria and fundamentals prior to partnering these companies, oftentimes they may just experience temporary setback and challenges just like many others but more often these companies have a history to bounce back.
What other reasons to sell my positions?
My selling criteria are when these companies operating earnings decline for 3 straight years. I pay close attention to their quarterly results when they show signs of decreasing earnings.
The other criteria to sell are when the payout ratio go above 100% for more than three quarters.
Finally, my last criteria is when they suspend or cut dividends. These usually happens when earnings have been declining for a while. For companies who have been growing dividends for a long time, the last thing they do is not paying dividends to their shareholders.
If, such company cut or suspend dividends it means that they are in a bad shape!
If that happens, I take the loss and move on.
MY FINAL THOUGHT
Blue chip companies are highly established and well-recognized companies. They are known for their long record of stable and reliable growth. As financially sound and strong these companies are, the most important aspect as an investor is to exercise due diligence.
Which blue chip companies have you invested in? What are your reasons and criteria on picking these companies?