3 ways to spot the best stocks for long-term gains

We’ve long relied on these three tips to find the best stocks to recommend in our investment services and newsletters, including our flagship advisory, The Successful Investor. We think they can help you pick winners, too.

1. Some of the best stocks have hidden assets: By hidden assets, we mean assets that are getting less investor attention than they deserve. When assets are wholly or partly hidden or ignored, a stock trades for less than it’s worth. So buyers get a bargain. These are also some of the best stocks for attracting takeover bids from corporate acquirers, who are usually looking to buy asset bargains, just like us.

Hidden assets can consist of real estate or underused brand names. For example, companies often carry their real-estate assets on the corporate books at its purchase price, even though its value has multiplied many times over the years.

Research and development spending by technology stocks is one of today’s best-hidden assets. High research and development budgets let tech stocks keep adding profitable new products to their lines and improving existing ones.

2. Dividends offer a measure of safety: We continue to recommend that you hold the bulk of your portfolio in well-established, dividend paying companies.

Companies with long histories of paying dividends are some of the best stocks you can invest in. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake — either the company has the cash to pay dividends or it doesn’t.

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A couple of decades ago, you could assume that dividends would contribute up to a third of your long-term investment returns, without even considering the tax-cutting effects of the dividend tax credit. Earlier in this decade, dividend yields were generally too low to provide a third of investment returns. But now that yields have moved up, it’s realistic to assume they will once again contribute as much as a third of your total return.

3. Don’t be discouraged if your stocks go through a long “dead money” period: Even the best stocks go through periods where they move sideways for a period of months or longer, producing no capital gains for you (stock brokers often refer to these stocks as “dead money”). However, this doesn’t necessarily mean there’s anything wrong with the stock or the company. In fact, many stocks qualify as “dead money” much of the time; their biggest gains occur in unpredictable spurts. Risk is relatively low in a high-quality stock that is going through a “dead-money” phase, by the way. But profits can be spectacular when it comes back to life.

Rather than trying to stay out of so-called “dead-money” stocks, it’s better to focus on building a portfolio that can produce a growing stream of dividends for you, plus long-term gains.

You can get our latest stock trading tips, plus buy/sell/hold advice on stocks you may be considering buying (or selling), in our Successful Investor newsletter. Click here to learn how you can get one month free when you subscribe today.