Blue Chip Stocks Can Make You A Millionaire!

Raamdeo Agarwal inspired us with his story on how Blue Chip Stocks compounding at a CAGR of 15-25% became multi-baggers with sheer passage of time. This confirmed our own investment hypothesis. But he was not content with giving theoretical advice. His firm Motilal Oswal Financial Services has made Blue Chip stocks the theme in their 16th Wealth Creation Study.

To qualify as a blue chip, the stock has to have the following features:

• Large cap companies in terms of revenue and capitalization
• Widely tracked and researched
 
• Easy entry and exit due to ample liquidity

• Highly priced stocks in terms of premium valuations and ticket price

The study defines blue chip stocks as follows:

“Blue chip investment involves buying and selling blue chips (i.e. high quality stocks) at right price. ‘Blue chip stocks’ is a common term used for highly priced stocks, which typically tend to enjoy premium valuations due to their high quality. They are also sometimes referred to as bellwether stocks.”

Raamdeo Agarwal points out that investors can benefit immensely from Blue Chip stocks if they:

(i) Make sense of blue chip valuations by observing their earnings growth, dividend payout ratios and price earnings;

(ii) Buy blue chip stocks based on valuation signals, which have back-tested evidence;

(iii) Follow a “buy-and-hold” strategy to enjoy the long term rewards of dividends and capital gains.

Motilal Oswal has identified 48 companies as blue chips after adopting a rigorous screening procedure. The filters adopted by Motilal Oswal are

(i) Twenty years of uninterrupted dividend payouts

(ii) Dividends raised in at least five out of last 12 years

(iii) Earnings growth in at least seven out of last 12 years

(iv) Average return-on-equity (RoE) of at least 15% for the last 12 years.

(v) At least 5 million shares floating suggesting big liquidity and trading volume

(vi) A company should be owned by at least 80 institutional investors.

There are simple common sense reasons why Blue Chips tend to do so well. Motilal Oswal lists them down:

(i) Good quality companies: safety of your principal amount

(ii) Far less risk: permanent loss of capital is zero

(iii) Strong dividend histories: handsome return on the principal

(iv) Growth potential than poor quality companies

The proof of the pudding in the eating. The returns that Blue Chip stocks have been able to garner will make the heart palpitate!!

 
So, the next time, you feel tempted to buy the stock of that dubious & unknown company in the hope of getting a multibagger, remember Raamdeo Agarwal and the Blue Chip stocks listed above.