Here are the key characteristics of good companies to invest in

good companies to invest in

Good companies to invest in share a number of key characteristics

High-quality blue chip stocks represent good companies to invest in. Blue chip companies are typically defined as firms whose stocks have a national reputation for quality, reliability and the ability to operate profitably in good times and bad. However, the problem is that “reputation” plays a key role in the definition.

Companies that have stood the test of time, and pose less risk to an investor even in the worst of financial times, are blue chip companies. Coca-Cola and Apple are two good examples.


True Blue Chips pay off

Learn everything you need to know in 'The Best Blue Chips for Canadian Investors' for FREE from The Successful Investor.

Canadian Blue Chip Stocks: Bank of Nova Scotia Stock, CP Rail Stock, CAE Inc. Stock and more.




Why blue chip companies are good companies to invest in

You can still look at blue chips as the strongest and most secure stocks on the market. Just be sure you look at the stock’s qualities and not just at the label. That’s because some blue chips only get their reputation through a strong public relations effort or by being in the right industry or business situation at the right time and place.

When assessing blue chip companies that are good companies to invest in, you need to ask: What are they doing to remain vital? These companies hold strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.

Stocks like these give investors an additional measure of safety in today’s volatile markets. And the best ones–the good companies to invest in–offer an attractive combination of low p/e’s (the ratio of a stock’s price to its per- share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.

Characteristics of top blue chip stock companies

Blue chip investments should pay dividends: Review a company’s 5 to 10 year record of paying dividends. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stock picks, you’ll avoid most frauds.

Good blue chips have low debt: It doesn’t matter if you’re investing in blue chip stocks or penny stocks, the company under consideration should have manageable debt. When bad times hit, debt-heavy companies often go broke first.

Blue chip investments should have industry prominence if not dominance: Major companies can influence legislation, industry trends and other business factors to suit themselves.

Good blue chip investments have the freedom to serve (all) shareholders: High-quality stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies. Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.

Good companies to invest in offer stability and more

It’s realistic to assume dividends from blue chip companies will continue to contribute around a third of your total return. In addition:

Dividends can grow. Stock prices rise and fall. Interest on bonds holds steady at best. But dividend paying stocks like to ratchet their dividends upward—hold them steady in a bad year, raise them in a good one. That gives you a hedge against inflation.

Dividends are a sign of investment quality. Some good companies reinvest profit instead of paying dividends. But fraudulent and failing companies are hardly ever dividend paying stocks. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

For a true measure of stability, focus on those companies that have maintained or raised their dividends during the recent recession and stock-market downturn. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.

Tip: Good companies to invest in don’t make themselves appear bigger than they are

Penny stock promoters love to make deals (however tenuous or indirect) with major, household name companies. The link with a major gives them instant credibility, especially with investors who are willing to buy penny stocks.

When penny stock promoters get a deal with a major, they go to great lengths to make it seem bigger than it is.

In fact, when a penny stock shoots up on the news of big-company involvement, and the mineral property/unproven technology/revolutionary software is still in the early stages of development, it’s often a good time to sell.

Bonus Tip: 40 stocks is a good upper limit for a Successful Investor

The right number of good companies to invest in for you, in part, on where you are in your investing career.

Most people have only modest amounts of money to invest when they’re starting out. Even so, it generally pays to invest at least several thousand dollars at a time, even if this means you can only buy a handful of stocks. Otherwise, your broker’s minimum commission will work out to too high a percentage of your investment on each trade.

Initially, you should aim to invest in a minimum of four or five stocks — one from each of most, if not all, of the five main economic sectors. But you can buy them one at a time, or over a period of months or even years, rather than all at once. After that, you can gradually add new names to your portfolio as funds become available, taking care to spread your holdings out as we advise.

When your portfolio gets into the $100,000 $200,000 range, you should aim for perhaps 15 to 20 stocks. .

When you get above $200,000 or so, you can gradually increase the number of stocks you hold. When your portfolio reaches the $500,000 to $1-million range, 25 to 30 stocks is a good number to aim for.

Of course, you may fall a few stocks below that range, or go a few above it, particularly when you’re making changes to your holdings. Our upper limit for any portfolio is around 40 stocks. Any more than that, and even your best choices will have little impact on your personal wealth.

How have you found good companies to invest in? Please share your experience with us in the comments.

This post was originally published in 2017 and is regularly updated.

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