You might have seen or heard market experts use the term ‘blue chip stocks’ to refer to a certain set of stocks. As a matter of fact, they even suggest including them in your investment portfolio. Ever wondered what these blue chip stocks are and what makes them different from the others? Here’s a comprehensive guide that can help you understand what these stocks are, their unique characteristics and their advantages and disadvantages.
What are Blue Chip Stocks?
Blue chip stocks is a term used to refer to the shares of well-established companies. These companies often have very stable businesses due to decades of experience, strong and stable financial performance, a good reputation in their industry and a consistent dividend payment track record.
What are Some Noteworthy Features of Blue Chip Stocks
Now that you’re aware of what blue chip stocks are, let’s look at a few characteristics that set them apart from other stocks.
Consistent Returns
One of the defining features of blue chip stocks is their ability to generate revenue consistently. A large portion of these revenues are often distributed to their shareholders in the form of dividends at regular intervals.Credit-Worthiness
Due to their strong revenue generation potential and consistent cash flows, blue chip stocks are generally regarded as very credit-worthy. The entities often have enough capital and profit reserves to clear most short-term and long-term debt obligations easily.Risk Factor
The risks associated with blue chip companies are lower compared to other categories of stocks. They’re far more resilient to volatility and changes in market and economic conditions.Investment Horizon
Blue chip companies are ideal investment options for meeting your long-term financial goals. Regular dividend payments can be a good source of alternative income and you get the potential for capital appreciation when you hold the stocks for the long term.Growth Prospect
Since the businesses of blue chip stocks are generally mature, they don’t have the same high level of future growth potential as some other categories of stocks.Taxation
The gains from your blue chip stock investments are subject to tax. Dividends, for example, are added to your total taxable income and taxed at the income tax rate applicable to you. The profits from the investments, meanwhile, are subject to either Short-Term Capital Gains (STCG) tax or Long-Term Capital Gains (LTCG) tax. In the case of STCG, the profits are taxed at a flat rate of 15%, whereas LTCG above Rs. 1 lakh is taxed at a flat rate of 10%.
Major Advantages of Investing In Blue Chip Stocks
Investing in blue chip stocks can help you enjoy a plethora of different benefits. Here’s a quick overview of some of the key advantages.
Stable and Regular Dividends
Blue chip companies consistently distribute the profits they generate to their shareholders in the form of dividends. The frequency of dividends, however, may vary depending on the company. The regular income you receive in the form of dividends from blue chip stocks can be a good source of passive income.Opportunity to Achieve Financial Goals
Blue chip stocks offer both regular dividend payments and the potential for capital appreciation. This makes them an ideal investment option for meeting your long-term financial objectives.Portfolio Diversification
The stability of blue chip stocks and their resilience to market volatility can help you diversify your investment portfolio and reduce its risk.Liquidity
Another major advantage of blue chip stocks is they’re very liquid, meaning that they can be bought and sold through the exchanges at any time without any hassles.Disadvantages of Investing In Blue-Chip Stocks As with any market-linked investment option, blue chip stocks also have certain disadvantages. Here’s a quick overview of what they are.
Slow Growth Rate
Since the businesses of blue chip companies are already mature, they have little future growth potential. This can limit their ability to appreciate in value over time.Low Dividend Yields
Although blue chip stocks make steady and regular dividend payments, the yields often tend to be low. The dividend yield is a metric that measures the amount of dividend a company pays relative to its current market price.Comparatively Expensive
The stock price of blue chip companies generally tends to be very expensive and may even be out of the reach of most retail investors.
What are Some Alternative Investment Options to Blue Chip Stocks?
If you’re looking for some alternative investments to blue chip stocks, here are a few other options you can consider.
Real Estate
Real estate investments are a good way to establish a passive income source. Also, they have good long-term capital appreciation prospects.Exchange-Traded Funds
Exchange-traded funds (ETFs) are mutual funds that are listed on stock exchanges. You can freely purchase and sell units of an ETF through an exchange like stocks. ETFs invest in a plethora of asset classes ranging from gold, equity and even debt instruments.Fixed Deposits
If you wish to receive steady and guaranteed returns without taking on risk, you may consider starting a fixed deposit with a bank or an NBFC. You can even avail a loan against the FD you hold to meet emergency fund requirements.Government Bonds
Government bonds are debt instruments issued by the government of India. Since they have sovereign backing, they carry little to no risk of default. However, the returns from the bonds are often low compared to other investment options.
Conclusion
Investing in blue chip stocks is a good way to diversify your investment portfolio. In addition to reducing risk, these stocks also provide you with a passive source of income through consistent dividend payments. However, not all blue chip stocks may perform the same. Therefore, always make sure that you determine the stocks that are right for you before investing.
