I'm a fairly seasoned investing hand, with more than a decade of experience under my belt. My early investing days were spent jumping in and out of many stocks, often those of small and not-yet-profitable firms. My investing attention deficit disorder cost me a lot: trading commissions each time I bought and sold, and short-term gains that got taxed at high rates. (Plus, of course, many losses.)
Over time, I began seeking out a different kind of investment -- one I could leave in my portfolio for what I hoped would be a long time, as it grew and grew and grew. I started craving a blue-chip portfolio.
In case you didn't know, "blue chip" is a term used to describe large and stable companies with established track records. So International Business Machines is a blue chip, while Wally's Waffles Across America is not (at least not yet).
One of the downsides of investing in blue chips is that it can be hard to find such great companies trading at attractive prices. If the firm is so wonderful, then most investors know about it and have bought, and the price is likely to command at least a bit of a premium. Fortunately, though, not all blue chips today carry lofty valuations.
Below, I review a few blue-chip companies that look attractive to me at recent prices. They may serve you well over the long haul. Of course, not every blue chip keeps firing on all cylinders -- look no further than struggling General Motors for an example. (Or Pan Am, Montgomery Ward, or Woolworth . you get the idea.) If you end up deciding that you'd rather not pick individual stocks on your own -- whether because of a lack of time, talent, or confidence -- then consider investing in some top-notch mutual funds that will do the work for you. Some have long-term records that are quite competitive with those of outstanding blue-chip stocks. More on them soon.
Some blue chips to consider
Without further ado, here are a handful of blue chips that I own and that I think merit some further research by interested investors.
Wal-Mart
This company needs little introduction. It's one that many people love to hate, but it's also one that delivers low prices to many consumers who want them, and according to a recent Fortune article, it's going green, at least to some degree (think organic foods and reductions in solid wastes and energy consumption). The company's numbers are staggering: Its annual sales are about a third of a trillion dollars. Below are some more numbers on it to jump-start your research.
- Annual sales: $324 billion
- Market capitalization: $185 billion
- Dividend yield: 1.5%
- 5-year dividend growth rate: 20%
- Forward P/E ratio: 15
- Average P/E over past 5 years: 27
- Return on equity: 23%
- Net profit margin: 3.6%
Home Depot
The home-improvement giant has seen its shares slump about 20% over the past few months, in part, perhaps, because of its recent annual shareholders meeting. The meeting was, by most accounts, a fiasco, with the board of directors not in attendance and CEO Bob Nardelli not answering shareholder questions. Still, the company is huge and growing and has a lot to offer patient investors. It has recently been renovating many of its stores and is focusing more intently on grabbing more business from contractors.
- Annual sales: $84 billion
- Market capitalization: $72 billion
- Dividend yield: 1.8%
- 5-year dividend growth rate: 20%
- Forward P/E ratio: 11
- Average P/E over past 5 years: 21
- Return on equity: 24%
- Net profit margin: 7.2%
PepsiCo
Don't think of PepsiCo as just a beverage company, because salty snacks make up a huge chunk of its business. Its brand names include Lay's, Ruffles, Doritos, Tostitos, Santitas, Fritos, Cheetos, Rold Gold, Funyuns, SunChips, Cracker Jack, Grandma's, Smartfood, Mountain Dew, Mug, Sierra Mist, Fruitworks, Aquafina, Gatorade, Propel, Smoothies, Quisp, Aunt Jemima, Sugar Puffs, Life, Rice-A-Roni, Tropicana, Quaker Oats, and Near East (whew!).
- Annual sales: $34 billion
- Market capitalization: $104 billion
- Dividend yield: 1.9%
- 5-year dividend growth rate: 13%
- Forward P/E ratio: 21
- Average P/E over past 5 years: 26
- Return on equity: 29%
- Net profit margin: 12.8%
Johnson & Johnson
J&J is a wonderful combination of many different businesses -- more than 230, to be exact. In its own words, the company is "the world's most comprehensive and broadly based manufacturer of health-care products, as well as a provider of related services for the consumer, pharmaceutical, and medical devices and diagnostics markets." Among many other things, it develops drugs, makes stents and shunts, and sells familiar items such as Band-Aids, Motrin, Tylenol, and baby powder.
- Annual sales: $51 billion
- Market capitalization: $186 billion
- Dividend yield: 2.4%
- 5-year dividend growth rate: 16%
- Forward P/E ratio: 17
- Average P/E over past 5 years: 23
- Return on equity: 30%
- Net profit margin: 21%
Let the pros pick your blue chips
Since none of the above is a risk-free investment, you'll probably want to read a lot more about each firm before you consider investing in it. I offered a few metrics, but you should ideally look at many more. Given that, you might reasonably look for a way out of all that work. Here's one: Let some financial smarties do most of your researching and investing for you.
You can do very well by investing in mutual funds that focus on large-cap companies. We can help you there via our MotleyFoolChampion Funds newsletter. Its picks' total average return is 17% vs. 8% for benchmark indexes. Last time I checked, more than half of its 40 picks were up more than 15%, and 16 were up more than 20%, which is darn impressive for mutual funds. One large-cap recommendation is up more than 21% in about a year and a half, invested in the likes of Microsoft
And one final option for you is our 2006 Blue Chip Report. It has 10 well-researched blue-chip ideas, a blue-chip fund, and two bonus picks. Last year's picks were up 21% versus 8% for the S&P 500, and we hope to do as well this year, too.
Here's to a happier portfolio! (And hey -- consider forwarding this article to anyone you care about. Just click on the "Email this Page" link near the bottom of the page.)
Wal-Mart, Microsoft, and Home Depot are all Motley Fool Inside Value picks. Johnson & Johnson is an Income Investor pick.
Selena Maranjian 's favorite discussion boards include Book Club , The Eclectic Library, Television Banter, and Card & Board Games. She owns shares of Wal-Mart, PepsiCo, Microsoft, Home Depot, and Johnson & Johnson. For more about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.
