If you want to find the best investments in Canada, look for blue chip stocks that have a history of paying dividends

If you are looking for the best investments in Canada, stick with top-quality blue chip stocks with sustainable dividends, because the income you earn from those dividends can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

Good dividend stocks are a valuable component of any sound Successful Investor portfolio. Note, though, that when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.

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The best investments in Canada give you reason to believe in them

The best stocks to hold in your portfolio all have one thing in common: They give you reason to believe they might be worth holding on to indefinitely.

Most of these stocks have well-established businesses and a history of sales gains, plus rising earnings. To put it more simply: these stocks have a clear business plan that seems to be working.

The best investments in Canada include top-quality blue chip stocks

We feel most Successful Investors should hold a substantial portion of their investment portfolios in securities from blue chip companies. This should include stocks that offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Successful Investors should also look for stocks that have above-average growth prospects, compared to their alternatives.

In general, blue chip stocks we recommend have a history of sound earnings and, in most cases, dividends. They have established their value over the long term. Like all stocks, they can fluctuate widely and many suffer in a long-term market downturn, but they offer a higher probability of long-term gains.

In a deep or long-lasting market setback, your blue chip stocks will tend to go down, along with everybody else’s. But we think they will go down less and recover sooner. At the same time, note that nobody can put a limit on how deep a market setback will go, nor how long it will last.

Use a value investing strategy to find some of the best investments in Canada

The core of the long-term value investing approach is identifying well-financed companies that are established in their businesses and have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does.

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele.

High-quality value stocks like these are difficult to find, even when the markets are down. But when you know what stocks to look for, you can discover them. Here are three of the financial ratios we use to help spot them:

• Price-earnings ratios
• Price-to-sales ratios
• Price-cash flow ratios

To avoid value stocks that are cheap—but will stay cheap—it’s important to use on more than a single ratio

Some of the measures that lead you into poor value stocks are statistical. They include unusually high dividend yields, unusually low per-share price-to-earnings, or P/E, ratios, or a low ratio of stock price to book value or other measures of per-share value.

Any of these measures can make it seem like a stock is a bargain. But in fact, any of them can simply be due to a low stock price that is the result of selling by well-informed investors who recognize a dismal long-term future.

Another way to fall into picking low-quality value stocks is to put too much faith in the value of a brand name. A strong brand can sell a lot of a strong product, or keep an over-the-hill product going long after competitors have faded. But even the strongest brand name can only do so much.

The best investments in Canada won’t be impacted substantially by periods of pessimism and optimism

John Templeton, a 20th century investing master, once said, “The four most dangerous words for an investor are ‘This time it’s different.’” What he meant was that the market goes through recurring cycles of optimism and pessimism, and that prices rise and fall in response. It’s dangerous to let yourself get caught up in a tide of optimism or pessimism and take it to mean the world has changed.

However, you need to remember that these four words are also easy to misapply. The underlying cycle of optimism and pessimism never disappears, but circumstances and fundamentals do change.

There are varying opinions about where and how to find the best stocks for a portfolio. What widely accepted advice have you decided to disregard over the years?