Topic: How To Invest

Investor Toolkit: How our ratings system finds the best stocks: Part 2

Investor Toolkit: Ratings System

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific advice, in this case showing you how we judge winning stock picks. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “Use our TSI Network ratings system to pick the right stocks: Part 2”

Last week in the Investor Toolkit, we looked at 4 of the 9 factors that we use to establish our TSI Network ratings: Highest Quality, Above Average, Average, Extra Risk, Speculative and Start-up. (View the post: How our ratings system finds the best stocks: Part 1.) These ratings appear next to every stock we recommend in our investment newsletters.

We use a point system to award our ratings, as I mentioned last week. This week, we’ll look at the 5 remaining factors we use to assess risk and build a profile of winning stock picks.

  1. One point for a long-term record of profit. A company that makes money just about every year will survive a lot longer than one that makes money sporadically, if at all.

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  1. One point for a long-term record of dividends. A steady or rising dividend provides a sign of safety. Dividends, after all, are impossible to fake — either the company has the cash to pay dividends, or it doesn’t. Failing or fraudulent companies hardly ever pay dividends.

    Two examples of companies with a long history of raising their dividends are Fortis Inc. (symbol FTS on Toronto), a stock we analyze in our flagship advisory, The Successful Investor, and McGraw-Hill (symbol MHP on New York), which we analyze in our newsletter on U.S. stocks for Canadian investors, Wall Street Stock Forecaster.

    Fortis is the main supplier of electrical power in Newfoundland and Prince Edward Island. It also operates power plants in the U.S., Belize and the Cayman Islands, and has other businesses across Canada.

    McGraw-Hill announced in September 2011 it will split into two separate companies: McGraw-Hill Markets, which will sell a variety of financial-information products and McGraw-Hill Education, which will publish textbooks for schools and colleges.

    Both companies have raised their dividends for 39 consecutive years. Fortis’ annual rate of $1.20 a share yields 3.6%. McGraw-Hill’s annual rate of $1.02 yields 2.2%.
  2. One point for an attractive balance sheet, with adequate equity and manageable debt. When bad times hit, debt-heavy companies go broke first.
  3. One point for being able to serve all shareholders. The best stocks in this area are free of heavy-handed government regulation, free of too much dependence on a single supplier and free from abuse by insiders.
  4. One point for Canada-wide operations, or two points for multinational operations. Companies that are confined to one geographical area are inherently more speculative than those whose operations are more spread out.

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