Here’s what to look for when investing in stocks—and how to fit them into a well-balanced and diversified portfolio.

Do you know what to look for when investing in stocks? We recommend investors build a portfolio mostly composed of well-established, dividend-paying companies. As well, some of the biggest profits you ever make will come from buying stocks before they find their way into the limelight.

When we’re looking for the best investments to recommend in our newsletters and investment services, we start by putting all the important information we know about a company into perspective. That helps us spot the best stocks—and in the long run, investors make most of their profits in investments that offer good value and an attractive long-term outlook.

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.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

What to look for when investing in stocks: Stay away from extremes

In the end, there are many ways to try to put the facts about a company into perspective. None are perfect, since all involve a mental balancing act between high and low estimates, history and the future, and faith versus skepticism.

Nonetheless, our goal is to put all the information we gather about a company into a form that lets us weed out the extremes—excessively overvalued stocks, or those that are suspiciously cheap.

What to look for when investing in stocks: Diversification is a key to profiting over time

Always maintain a diversified stock portfolio—and avoid the temptation of trying to pick hot stocks or sectors.

Different investors may be more comfortable holding a larger or smaller number of investments in their portfolios, including stocks and exchange-traded funds (ETFs). Here are some tips on diversifying your stock portfolio:

When it comes to a diversified stock portfolio, stocks in the Resources, and Manufacturing & Industry sectors, in general, expose you to above-average share price volatility.

• Stocks in the Utilities and Canadian Finance sectors entail below-average volatility.
• Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and the more-stable Canadian Finance and Utilities companies.

Most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

Find out what to look for when investing in stocks and learn why blue-chip companies are top holdings for your portfolio

Some of the most successful investors we’ve met know what to look for when investing in stocks: blue chip companies. 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 continue to 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 markets. And the best ones 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.

Here are some characteristics of top blue-chip stock companies to help you can make smart investment decisions

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 is better. There’s extra risk in firms confined to one geographical area.

Above all, use our three-part Successful Investor approach to help you find the best dividend-paying stocks

1. Invest mainly in well-established, dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight. 

What is the first data point you look for when considering stocks to buy?

What are the most important considerations for you when you buy a stock?