Reading

4. Scan the text and match the subheadings to the parts I-V.

A Blue Chip Advantages

B The Bottom Line

C How to Invest in Blue Chip Stocks

D Basic Characteristics of Blue Chip Stocks

E Blue Chip Disadvantages

Banking On Blue Chip Stocks

Blue chip stocks, named after the highest-valued chips in poker, are prized investment holdings representing ownership in some the most successful firms in the economy. If you want to invest in companies that have proven their ability to ride out economic downturns and maintain profitability even when times get tough, you should take a look at these stocks.

I. _____. A blue chip stock is a share of ownership in a large, well-established and stable company that has a long history of consistent earnings growth and dividend payments. Blue chip companies have a large market capitalization, strong balance sheets and good cash flow. Blue chip stocks have low volatility overall, but strong changes in the overall market can also have strong effects on these stocks. The performance of an individual blue chip company will tend to correlate closely with the performance of the S&P 500.

Many blue chip stocks are household names, such as American Express, Boeing, Coca Cola and Disney. However, a company doesn't have to be a household name to be a blue chip.

II. _____. Blue chips are supported by proven business models, slow but consistent growth and strong cash flow. They are a good option for capital preservation and their dividend payments not only provide income, but also help protect against inflation. Blue chips tend to be stable even during recessions and, because they're widely owned by both individuals and institutions, they have high liquidity.

III. _____. In exchange for the stability associated with blue chip stocks comes slow growth and lower returns. Growth stocks and real estate investments can offer higher returns to investors willing to accept greater risk. Blue chip stocks can also be expensive, and if you're investing in individual stocks, you need to make sure to diversify to avoid company risk.

IV. _____. To invest in blue chips, you have a few options. You can directly purchase individual shares through a brokerage. If you choose this route, you might to want use a value investing strategy to try to purchase these stocks when they're underpriced.

An important characteristic of blue chip stocks is that they not only consistently pay dividends to their shareholders during times of better and worse company performance, but they increase their dividends more years than not. To locate stocks with an excellent track record of dividend increases, see the S&P's Dividend Aristocrats and Mergent's Dividend Achievers. You can also invest in a basket of blue chip stocks through mutual funds and ETFs.

V. _____. If you want to invest in market-leading companies with a proven track record and low volatility, look no further than blue chip stocks, mutual funds and ETFs. They may not be as glamorous as the latest growth stocks, but they can quietly help you achieve your long-term investing goals.