Topic: How To Invest

Finding the best reliable stocks for a more-secure portfolio is possible—if you follow our advice

Include dividend-paying blue chips as you add the best reliable stocks to your portfolio, but select them wisely for greater levels of safety. Here’s what to look for.

Dividend-paying blue chip stocks are some of the best reliable stocks, especially  if they offer good “value”—that is, they trade at reasonable multiples of earnings, cash flow, book value and so on.

We feel most investors should hold a substantial portion of their investment portfolios in securities from blue chip companies. Ideally, they should also have above-average growth prospects, compared to alternative investments.

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 Recognize that the best reliable stocks are often blue chips, which can bring steady profits to your portfolio.

Blue chip stocks we recommend have a history of earnings and, in most cases, a history of sustainable 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.

We advise investors to look for blue chip companies that are likely to pay off if business and the stock market are good, but that won’t hurt them too much during those inevitable periods when business or the markets are bad.

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.

Looking for the best reliable stocks that pay dividends in Canada? They will have these characteristics 

  • The best dividend stocks offer sustainable dividends: It’s important to watch out for unusually high dividend yields. Investors should avoid judging a company based solely on its dividend yield. That’s because a high yield can sometimes be a danger sign rather than a bargain—it can signal an imminent dividend cut.
  • The best dividend stocks will include these positive financial factors: As a general rule, companies that make money regularly are safer than chronic or even occasional money losers. If you only buy dividend-paying stocks, you’ll avoid most frauds. Furthermore, the more manageable the debt, the better. When bad times hit, debt-heavy companies often go broke first—especially ones that also keep trying to allocate part of their cash flow to paying dividends.
  • The best dividend stocks have hidden assets: Successful investors recognize that hidden assets are a great way to cut risk, for conservative and aggressive investors alike. One great example is research and development.

Here are some additional factors for finding the best dividend stocks

  • Management’s public commitment to a dividend. A company’s commitment to the dividend is reinforced if management stands behind it publicly. Executives don’t like to be called out by the media or shareholders for failing to keep their word.
  • A recent dividend increase. There are good reasons companies trumpet their dividend hikes. They are more than a reward to shareholders—they’re a statement of self-confidence by the company.
  • A record of earnings and cash flow. A consistently strong balance sheet can only be maintained with a regular stream of revenue and earnings to generate steady cash flow.

Know that the best reliable stocks can bring hidden value to your investments

Hidden assets can be the tipping point for investing in dividend growth stocks. Hidden assets can come in the form of real estate, a loyal customer base, or a loyal following. For instance, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the purchase price remains unchanged on the balance sheet.

You have to look closely to spot this hidden value. At times, the hidden value in a company’s real estate can come to exceed the market value of its stock. This hidden value may only become apparent to investors when the company upgrades the use of the real estate. For example, a merchandiser might repurpose a parking lot to build a shopping mall with a residential condo tower on higher floors, and a parking garage down below.

Understanding and seeking out hidden assets while you’re evaluating a dividend growth stock can add enormously to your profits over the course of your investing career. But you need patience to profit from them, because they can stay hidden for a long time after you buy.

Hidden assets can also cut your risk. Stocks with hidden assets are likely to hold up better than those whose assets are easier to spot, since they are the last stocks that experienced, successful investors sell. When times are good, on the other hand, stocks with hidden assets tend to do better than average.

All in all, finding a dividend paying growth stock can be a great way to boost the long-term returns of your investment portfolio.

 Use our three-part Successful Investor approach to find the best reliable stocks

 You still need to observe our three key portfolio rules, even when confining your investments to stocks with strong dividend records. They are:

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

 What is the most reliable investment in your portfolio?

Do you have any characteristics you look for in a stock to determine if it will be a profitable and reliable investment?

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