Blue chips are well-established, financially sound companies with products that almost everyone loves. Investing in blue chip companies and reinvesting the dividends is a strategy that can provide reliable, market beating returns over the long term.
A blue chip myth
A myth regarding blue chip companies is that their days of growth are over and that an investor can only achieve minimal returns by investing in them.
While this may be true with some large cap companies, it is definitely not true with a majority of blue chip companies. Companies that I consider to be the “Bluest of the Blue” have the ability to sustain significant growth and provide exceptional shareholder returns over the long term due to their great brands, innovation, and effective leadership.
Every company will have difficult periods at some point, but blue chip companies typically have the resources and popularity that is required to attract top of the line executives and CEO’s that can right the ship and effectively guide the company back to greatness when things are not going as planned.
Qualities to look for in blue chip companies
Look for the following traits in order to invest in the best blue chip companies that will stand the test of time:
Great brands that almost everyone loves
Products that are in demand whether the economy is booming or in a recession
A diverse group of products/services
A significant and growing dividend
The Bluest of the Blue!
There are a handful of blue chip companies that I consider to be the “Bluest of the Blue.” This group of companies has all of the traits listed above and can be confidently bought and held over the long term. I plan on releasing a series of articles detailing each company out of my “Bluest of the Blue” group of companies. The first company I am highlighting is Chevron Corporation (NYSE:CVX) , which is one of my favorite “Bluest of the Blue” companies.
Energy is a vital component of society and Chevron Corporation (NYSE:CVX) is involved in every aspect of the energy marketplace, including oil/natural gas exploration and production, oil refining, gasoline sales, energy marketing/trading, pipelines, coal mining, power generation, and petrochemicals. Chevron Corporation (NYSE:CVX) is one of the most trusted energy brands in existence and operates globally.
Chevron Corporation (NYSE:CVX) achieved an exploration success rate of 74% in 2012, which greatly exceeds its 10-year average of 54%. In addition, Chevron has made a large number of significant long-term investments that should boost earnings in upcoming years. One example is the construction of a lubricants facility at its Pascagoula, Mississippi refinery, which is projected to make Chevron Corporation (NYSE:CVX) the worlds largest producer of premium oil products.
Chevron’s financial progress has been steady, with net income increasing from $7.2 billion to $26.2 billion over the last decade. Not surprisingly, Chevron Corporation (NYSE:CVX)’s earnings took a hit during the great recession, but recovered nicely.
A fabulous dividend!
A common characteristic of my “Bluest of the Blue” group of companies is an excellent dividend history, and Chevron has one of the best! Its dividend has almost tripled over the last decade, resulting in a current yield of 3.2%. Considering Chevron’s low payout ratio of 30%, I believe that its generous and impressive dividend increases will continue well into the future.