Topic: Growth Stocks

Here’s how to make investments in Canada for a strong growth portfolio with lower risk

Canadian dividend stocks

Discover how to make investments in Canada successfully by understanding the best types of growth investments to add to your portfolio

Growth investing is the process of investing in companies that have above-average growth prospects. These growth stocks are generally companies whose earnings growth have been above the market average, and are likely to remain above average. For the most part, they pay only small dividends if any. That’s because instead of dividends, most re-invest their cash flow in their businesses, to promote their growth.

At the same time, growth investments tend to be more volatile than value stocks. So that’s why at TSI Network we use a sound long-term investment approach when it comes to choosing growth investments.

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Growth investing is a key part of portfolio building—but be aware of the risks

Of course, you need a growth element in your portfolio. Returns from successful growth investments can offset the drain of disappointing stocks, which are inevitable in any portfolio. But too much focus on growth can lead you to make mistakes. For instance, it may lead you to

buy stocks that are in the broker/media limelight. Many of these stocks need huge profit gains to justify their current stock prices, let alone move higher. If their growth stalls, it can bring on big stock-price downturns.

Among the considerations that go into a successful growth investing strategy, savvy investors look for these important factors that can considerably lower their risk:

  • Don’t overindulge in aggressive investments.
  • Keep stock market trends in perspective.
  • Be skeptical of companies that mainly grow through acquisitions.
  • The best growth stocks should have the ability to profit from secular trends.
  • Keep an eye on a growth stock’s debt.
  • Look for growth stocks that have ownership of strong brand names and an impeccable reputation.
  • Balance your cyclical risk.

Learning how to make investments in Canada successfully includes knowing about these three types of growth Investments

There are a few stock groups which have historically shown strong growth potential, although most come with a higher level of risk. Here’s a look at three of those groups:

Small-cap Stocks: The size of a company is based on its market capitalization, or net worth. Market capitalization is the total value of all the company’s outstanding shares. It is calculated by multiplying the number of shares outstanding by the market price of a single share. There is no universal definition for a “small cap” company compared to a micro-, mid- or large-cap company. Many analysts, however, consider any company with a market capitalization of between $250 million and $1.2 billion to be a small-cap firm.

Companies in this category are often still in their early phases of growth. Their stocks have the potential to increase significantly. But while small-cap stocks have historically posted higher returns than blue-chip stocks, they are generally more volatile. They also carry a higher degree of risk.

Technology and Healthcare Stocks: Investors who seek a growth stock with strong potential often look for companies that develop new technologies or offer innovations in healthcare. The stocks of companies that develop popular or revolutionary products can rise exponentially in price over a relatively short period of time. Just make sure they are beyond the concept stage and have a real product or service to offer.

Speculative Investments: Aggressive investors frequently look to high-risk speculative growth investments such as penny stocks, futures and options contracts, foreign currency and real estate deals that involve undeveloped land. If you pick right, you could earn a return that is many times their initial investment. But you are more likely to lose money in the end.

A dividend growth investing strategy that focuses on sustainable dividends cuts your portfolio risk

As with conservative dividend-paying stocks, dividend growth stocks offer investors an added measure of security. 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 them or it doesn’t.

However, at the same time, it’s important to avoid judging a company based on the fact that it pays a dividend. Nor should you be tempted solely by a high dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price).

As well, you should always remember that while growth stocks can hold the potential for greater gains than conservative selections, they typically expose you to a higher level of risk—even if they are dividend-paying stocks.

That’s why we look beyond dividend yield when making investment recommendations, and look for dividend stocks that have an established business and at least some history of building revenue and cash flow.

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