June 30, 2009

Have you heard the term, “blue chip stocks” and didn’t know what that meant?  One of my readers says yes to this question.  She wrote to me and said that she had heard this term over her years but didn’t understand what it was or why it was important.

I wanted to talk about this today because we’re busy putting together our no hassle portfolio. (CLICK HERE TO READ OUR FIRST PICK)   This portfolio is designed for the person who doesn’t have time to follow their stocks every day.  It will be filled, largely, with blue chip stocks.

Doesn’t it always seem to be that way?  We hear all of these various terms when we are trying to do the right things with our money but it would take a lot of work to know all of the lingo.  Blue chip stocks are what we would consider to be the best of the best in quality.  They are the name brand stocks.  If you wanted a blue chip shoe, you may by a snazzy looking pair of Nike.  If you wanted to buy a blue chip TV, you might buy a Sony.

How do you spot a blue chip stock?  The easiest way (although not quite this easy) is to the look at the Dow Jones Industrial Average.  What you will find when you look at the Dow Jones are 30 stocks, most fitting what we are looking for if we want a portfolio of blue chip stocks.  In fact, the Dow Jones is often called the blue chip index.

Be warned, though.  Just because it’s a member of this elite group of 30 stocks, that doesn’t mean it’s the best of the best.  General Motors was a member of the Dow Jones until the day it went bankrupt.

What are we looking for in blue chip stocks?  First, they have a great looking balance sheet.  More assets than liabilities.  If, at your home, you spend more money than you make and your credit card balance is going up faster than a hot air balloon, your balance sheet is not good.  If your home were a stock, you wouldn’t be a blue chip stock.  Keep in mind that analyzing the balance sheet of a company is a little more complicated than this simple example.

Next, it pays a dividend.  When you put money in a savings account at your local bank, they pay you a dividend.  In this case, your dividend is interest.  Finally, these stocks normally move at about the same rate as the S&P 500.  This is a collection of 500 stocks that is largely followed as a picture of how the market is doing.  When a stock moves in the same direction and rate as the S&P 500, it’s a very safe stock.

Now, why is it important to know about blue chip stocks?  If you’re somebody who doesn’t have a lot of time to tend to your investments, you want safe investments in established companies.  Now that you know what blue chip stocks are, you can easily find those stocks.  Look first at the Dow Jones Industrial Average.

Don’t forget to check our No Hassle Stock Portfolio if you’re looking to get in to the stock market with very little work.