ASX blue-chip shares can make excellent investments. ASX growth shares are also able to deliver great returns, but ASX blue-chip shares may be better for a few reasons.
While there aren't any exact factors that define what a blue chip share is, they should be at least a minimum size in market capitalisation and have a strong brand/reputation in their industry. They also typically have a history of delivering good levels of profit generation.
Australia has a number of impressive businesses including the major ASX bank shares such as National Australia Bank Ltd (ASX: NAB), mining giant Rio Tinto Ltd (ASX: RIO), telco leader Telstra Group Ltd (ASX: TLS), Bunnings and Kmart owner Wesfarmers Ltd (ASX: WES), global investment bank Macquarie Group Ltd (ASX: MQG), industrial global property business Goodman Group (ASX: GMG) and supermarket retailer Coles Group Ltd (ASX: COL).
What's so good about ASX blue-chip shares compared to ASX growth shares? Here are my thoughts.
Less volatility
When a bear market hits, it's common for the share prices of ASX small-cap shares and ASX growth shares to fall further than the share prices of ASX large-cap shares.
For investors who really don't like seeing their portfolio go down in value, it could be beneficial to own shares that may not drop as much in an economic downturn. This can help them stay invested until the market recovery comes along.
Blue-chip shares typically have a strong market position and a history of making large and resilient profits. Seeing as investors usually value a business on how much profit they're making, it's understandable why blue-chip share prices could hold up well if the profit is likely to be robust, too.
Better balance sheets
Larger businesses like blue chips tend to have stronger balance sheets, with bigger piles of cash and possibly less debt compared to how much profit they make.
The strength and makeup of the balance sheet are always important, particularly in weaker times.
A strong balance sheet enables a company to gain cheaper funding from lenders/shareholders and it also allows the business to invest for growth.
Times of recession can enable larger businesses to acquire financially distressed smaller competitors.
Already proven themselves
There are plenty of ASX growth shares priced for revenue growth in the coming years.
Those highly-valued growth shares need to deliver on that potential to justify their valuation. Not every business is destined to reach the heights that investors are expecting.
Just because a company points to a large total addressable market doesn't mean it's going to reach a meaningful market share. Other companies in the sector are also targeting the same addressable market – they can't all succeed.
If there's a misstep by an ASX growth share on that journey, you can see a significant sell-off.
Most ASX blue-chip shares have already reached a strong position in their market, they're making enormous profits and achieving strong cash flow for shareholders.
Stronger passive dividend income
When a business is making large profits and it's not priced for strong growth, the dividend yield can be attractive.
Blue chips are usually mature businesses, so they're not trying to retain most of their profit to invest for more growth. They can afford to send more of the profit to shareholders each year.
A lower price/earnings (P/E) ratio and a higher dividend payout ratio can combine to create a pleasing dividend yield.
Foolish takeaway
The ASX isn't the only place to find blue chips. Large, international companies can make very appealing investments because they aren't finished growing profit at a solid rate because they're targeting the global economy. I'm thinking about names like Microsoft and Alphabet.
I think our portfolios can have a mixture of ASX blue-chip shares and ASX growth shares. Ultimately, they both have their advantages, and the successful ASX growth shares can deliver enormous returns.
