Topic: How To Invest

How to select the best stock picks for a successful portfolio

Western Union

Discover how to make the best stock picks—including growth stocks, value stocks, and income stocks

If there was a single secret to picking the best stock picks, everyone would know it by now.  When you start investing, you may think the secret to investment profit and finding the best stock picks is to “buy low, sell high.” But that’s hard to do. You’ll often buy just before prices fall, or sell just before they rise. If you stick to high-quality value stock picks, however, your short-term gains and losses can average out and you’ll still profit greatly in the long run.

The best stock picks: Income stocks that have consistently paid dividends for many years.

When you pick the best income stocks, you are, for the most part, investing in the safest and most secure companies. That’s in large part because of the dividends that the best income stocks pay. 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 dividends or it doesn’t.

However, it’s important to remember that not all income stocks are created equal. Here are two key guidelines we use to pick the best income stocks.

1. A reasonable dividend yield: You can identify income stocks by their high dividend yields (the percentage you get when you divide a company’s current yearly payment by its share price). For example, stocks with a dividend yield higher than, say, 3% would typically be attractive to an income-seeking investor.

However, it’s important to 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. For example, a company’s dividend yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield). That can be a sign of an imminent dividend cut.

2. Maintaining or increasing dividends: Apart from a high dividend yield, you should look for stocks that have a long history of paying (and raising) their dividends. For a true measure of stability, focus on those companies that have maintained or raised their dividends during economic and stock market downturns.

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.

Two fundamental factors that will help you make winning growth stock picks

1. Know the difference between momentum stocks and growth stocks: It’s very easy to confuse growth stock picks with momentum stocks. Like growth stocks, momentum stocks often move up faster than the market averages. But momentum stocks attract a different kind of investor. Growth-stock investors are in it for the long haul, while momentum investors aim to profit from short-term trades. Momentum investors are particularly keen to jump in on a so-called “positive earnings surprise.” That’s when a company outdoes brokers’ earnings estimates.

2. Add value stocks as well to lower your portfolio’s volatility: Most successful investors hold some growth stock picks and some value stocks at any given time, depending on where they discover the best opportunities.

Value stocks are stocks trading lower than their fundamentals suggest. They are perceived as undervalued, and have the potential to rise. Some technology stocks, for instance, start out as growth stocks and transition into value stocks.

Together, growth stocks and value stocks can form a winning combination. A growth stock can be a top performer while the company is expanding. However, a single quarter of bad earnings can send it into a deep, though often temporary, slide. Value stocks can test your patience by moving sluggishly for months, if not years. But they can make up for it by rising sharply when investors discover their true value.

Financial factors to look for in the best stock picks

  1. 5 to 10 year history of profit.
  2. 5 to 10 years of dividends.
  3. Manageable debt.

Safety factors to look for in the best stock picks

  1. Industry prominence if not dominance.
  2. Geographical diversification.
  3. Freedom to serve (all) shareholders.

Survival/growth factors to look for in the best stock picks

  1. Freedom from business cycles.
  2. Ability to profit from secular trends.
  3. Ownership of strong brand names and an impeccable reputation.
  4. Spinoffs are often undervalued stocks in disguise.

What are the best stock picks in your portfolio? How have they performed for you? Share your story with us in the comments.


Tell Us What YOU Think

You must be logged in to post a comment.

Please be respectful with your comments and help us keep this an area that everyone can enjoy. If you believe a comment is abusive or otherwise violates our Terms of Use, please click here to report it to the administrator.