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What are Canada’s blue chip stocks?

We explain why investing in blue chip stocks can be a good strategy.

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If you’re interested in investing in the stock market, you’ve probably come across the term ‘blue chip’ stocks. You may be wondering what they are and how you can invest in them.

The term is a little vague, but generally speaking blue chip stocks are major listed companies that have had a good financial track record spanning many years. These kinds of companies tend to be safer and less volatile than other stocks and often pay a dividend.

During a stock market crash, a recession or market volatility, you’ll often hear analysts suggest blue chip stocks to buy. The reasoning here is that major companies are more likely to weather a storm and hence their impacted stock prices are expected to rise again after the crisis ends.

What are blue chip stocks?

Some of the typical characteristics of a blue chip company includes:

  • Large company
  • Good financial track record
  • Older companies
  • Pays dividends

What are Canada’s blue chip stocks?

There’s no official list of ‘blue chip’ stocks – the closest we have is the list of companies on the S&P/TSX 60 index, a list of Canada’s top companies by market capitalization. It includes companies with a history of providing steady returns and minimal volatility to investors. These companies are spread across a range of market sectors, including:

Information from web.tmxmoney.com on June 8, 2021.

Banking and financial services

Companies in Canada’s financial sector make up a large portion of the nation’s top stocks. These companies tend to have a history of providing large dividends and include Brookfield Asset Management Inc. as well as the “Big 5” banks: RBC, TD, Bank of Nova Scotia, Bank of Montreal and CIBC.

Resources sector

As mining is a cyclical industry, resources companies have the potential to provide high capital growth, at the same time have a reputation for underperforming when the mining industry experiences a downturn. Having said that, companies such as First Quantum Minerals Ltd., Barrick Gold Corporation, Agnico Eagle Mines Limited and Franco-Nevada Corporation and Cameco Corporation all feature in the S&P/TSX 60.

Retail sector

Retailers tend to offer medium-sized dividends to shareholders, and Dollarama Ltd., Shopify Inc. and Canadian Tire are popular choices among investors.

Energy & utilities sector

Given that the demand for energy and utilities is ongoing, companies in these sectors often stay relatively stable during periods of economic decline. BCE Inc. (formerly Bell Canada Enterprises Inc.), TC Energy Company, Enbridge Inc., Canadian Natural Resources Limited, Fortis Inc. and Cenovus Energy Inc. have often been cited as top investment choices.

Should you invest in blue chips or small caps?

While blue chip stocks tend to be a safer investment, they don’t usually rise considerably in value over a short-time frame unless you can scoop them up at a discount during a downturn. This means that blue chips are long-term investments or used to provide an ongoing incoming through dividends.

Those looking to make a quick buck by striking it lucky invest in riskier but smaller companies called ‘small-caps’. When you invest in a small company you’re betting that it will be the next big thing and turn that pocket money into millions.

It can be tempting to take a punt on speculative companies. These are companies that do not have a long, well-established history of providing stable returns to investors. They’re also typically located outside the list of the top 100 companies in Canada. These are sometimes called ‘growth stocks’ and the smallest are penny stocks – those that trade at less than $5 per stock.

Blue chip stocks vs penny stocks

Blue chip stocks. A blue chip stock is usually an older, well-established company that has a reliable history of weathering against tough times and of growing profits. Examples include: TD Bank, Canadian National Railway, Suncor and Loblaw.

Penny stocks. Penny stocks tend to trade for less than $5 and are also called micro-cap stocks or small-cap stocks. The idea is to buy them for a low price with the promise of big profits later. They’re generally riskier, speculative stocks.

The benefits of dividends

There are 2 ways to earn money from stocks. Not only can you benefit from capital growth in the value of stocks over time, but you can also earn an income from dividends. Dividends are more often paid out by blue chip stocks, which is part of what makes them so attractive.

A dividend is a company’s way of distributing its profits to shareholders. Many companies listed on the TSX pay dividends 2X a year, including a smaller “interim” dividend and a larger “final” dividend. However, not all companies pay dividends to shareholders, and will instead invest all of their profits back into the company.

Dividends tend to be paid by larger, well-established companies on the TSX and you can use them to provide a regular, ongoing source of income. This offers you security and stability for the future, while at the same time giving you a chance to benefit from the company’s long-term capital growth.

How to buy blue chip stocks in Canada

  1. Choose a stock trading platform. Check out reviews of popular platforms as well as comparable alternatives. If you want a “set it and forget it option,” look into robo advisors that can select and manage investments for you based on your risk tolerance and financial goals.
  2. Open your account. You’ll need your ID, bank details and your Social Insurance Number (SIN) or tax identification number.
  3. Confirm your payment details. You’ll need to fund your account with a bank transfer, debit card or credit card. You may also be able to transfer via PayPal depending on the platform.
  4. Find the stocks you want to buy. Search the platform and buy your stocks. It’s that simple.

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Tips when choosing stocks

Make a plan

  • Before you start buying or selling stocks, consider exactly what you want to achieve with your stock portfolio and in what time frame. Once you have a plan in place, you can then choose your investments accordingly.

Don’t panic

  • Stock markets fluctuate all the time – look at historical graphs charting the performance of the TSX for proof of this – so don’t panic at the first sign of stock prices heading south. Stick to your plan and ride out any dips or down periods.

Consider your investment goals

  • Are you looking for stocks to provide capital growth or to generate income? Smaller companies tend to focus more on growth and therefore reinvest profits into their business, while larger companies tend to pay dividends to their shareholders.

Don’t forget about dividends

  • Dividends can provide a stable source of ongoing income during uncertain financial times. Look at companies with a history of paying high dividends to shareholders to see whether they could provide an attractive investment option for you.

Choose companies wisely

  • Blue-chip stocks, also known as large-cap companies, tend to offer secure, stable returns and a minimal level of risk. Smaller companies outside the top 50 or 100 companies on the TSX may provide larger growth potential, but they also come with a much higher level of risk attached.

Research before you buy

  • Looking at a company’s annual reports, earnings and historical performance will help you form a clearer picture of whether it is a sound investment. If you’re using an online stock trading platform, you may also be able to access research reports and buy or sell recommendations for various companies.

Know what long-term means

  • In order to ride out any periods of market volatility and enjoy the maximum returns, you typically need to look at an investment time frame of 7-10 years when choosing stocks.

Consider other investment options

  • Depending on your investment goals and appetite for risk, you may also want to consider other options, such as exchange traded funds (ETFs). ETFs are bought and sold on the TSX just like stocks, but they allow you to gain exposure to a stock index or other group of underlying assets (similar to a mutual fund).
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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