The best Canadian stocks will have the investment quality your portfolio needs over the long term
There are a variety of reasons why you should add some of the best Canadian stocks to a Successful Investor-style portfolio. Most important, the stocks to buy and hold in your portfolio all have one thing in common: They give you reason to believe they might be worth holding on to indefinitely.
We feel most investors should hold a substantial portion of their investment portfolios in securities from blue chip companies. The best of these stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above-average growth prospects, compared to alternative investments.
What defines a “buy and hold forever” stock?
A “buy and hold forever” stock is typically a high-quality company with durable competitive advantages (economic moats), consistent profitability, strong management, predictable cash flows, the ability to grow dividends over decades, minimal debt, and operates in essential industries that will remain relevant regardless of economic cycles—essentially businesses so fundamentally sound that investors can own them indefinitely without worrying about timing the market.
How many “forever” stocks should I own?
Most investment experts recommend owning 15-30 “forever” stocks to achieve adequate diversification while still being able to thoroughly research and monitor each holding—enough to spread risk across different sectors and companies, but not so many that you can’t stay informed about each business or that additional stocks provide meaningful diversification benefits.
How do forever stocks fit into an RRSP or TFSA?
Forever stocks are ideal for RRSPs and TFSAs because their long-term growth potential and dividend income can compound tax-free (TFSA) or tax-deferred (RRSP), maximizing the benefit of these registered accounts—since you won’t be actively trading these holdings, you avoid triggering unnecessary taxes while letting high-quality businesses grow your wealth over decades within the tax-sheltered environment.
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What are the common mistakes when trying to buy and hold forever?
Common mistakes when trying to buy and hold forever include: selling during market downturns due to panic or fear, chasing high dividend yields without considering sustainability, not diversifying across sectors, failing to monitor company fundamentals over time, buying trendy companies without durable competitive advantages, setting unrealistic expectations for constant growth, not reinvesting dividends to maximize compounding, and abandoning the strategy during periods of underperformance instead of staying patient with quality businesses through inevitable market cycles.
Learn how you can find the best Canadian stocks using our Successful Investor guidelines
We believe that high-quality stocks are your best protection in a portfolio. To find those stocks, and build a sound portfolio, start with our Successful Investor philosophy:
- Invest mainly in high-quality, well-established companies, with a history of earnings if not dividends;
- Diversify across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
- Downplay or stay out of stocks that are in the broker/media limelight.
“Buy and hold” is a bad way to describe what we recommend. We prefer “buy and watch closely.” But we still think frequent trading is apt to make money only for your broker.
In short, our strategy focuses on the concept of “buy and watch closely.”
Obviously, it is easier to hold high-quality stocks that perform well over time. But we do not recommend that you hold indefinitely.
We advise selling particular stocks when we feel the situation has changed and they no longer qualify as high-quality investments. We also sell if we decide that a stock isn’t as high-quality or well-established as it needs to be to cope with the challenges it faces. Of course, many of our sales are due to a successful takeover of a company’s stock, which generally results in a major profit.
Buy blue chip stocks if you want to add some of the best Canadian stocks to your portfolio
A company with a long-term record of paying dividends is generally one that is most deserving of the “blue chip” label in its traditional sense. 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.
The best blue chips offer both capital gains growth potential and regular dividend income. The dividend yield is certainly one of the most concrete indicators of a sound investment. It is the percentage you get when you divide the current yearly dividend payment by the share or unit price of the investment. It’s an indicator we pay especially close attention to when we select stocks to recommend in our investment newsletters.
Keep in mind that when you are buying the best Canadian stocks, you should not expect to pay lower than market prices
For many investors, buying stocks involves a two-part decision. First, they decide which ones to buy, then they decide what price they want to pay. Most want to buy, say, 5% to 10% below current prices.
These investors often explain that they are simply looking to buy stocks like a smart consumer buys a car. However, the stock market is more efficient than the car market, as an economist would put it. To get a lower price on a stock, you have to wait for its price to come down.
If you always try to buy below the market, you’ll always get a “fill” on stocks with hidden flaws. They’ll always come down into your buying range ... and they’ll keep on falling.
But you’ll never get to buy the other kind of stock—the kind that keeps going up. They’ll always seem too expensive, and they’ll go on to get even more expensive. But you need a few of these ever-more expensive stocks to offset the losses from those that get cheaper and cheaper.
Bonus Tip: Find out how to place orders with your broker for the best Canadian stocks
When buying stocks, most investors place “market orders” or “limit orders.” However, which is the better form of order? It’s a decision many investors have to make each time they buy a stock.
When you understand the use of market and limit orders, you can improve the profitability of your stock investments.
For most investors, market orders are a better approach than limit orders.
A market order is an order to buy or sell a specific number of shares at the best price available when you place your order. In contrast to limit orders, market orders are almost always filled within a very short period of time—in minutes, if not seconds.
However, you only learn the price you paid (for a purchase) or received (for a sale) after the order is filled. The market price may change, for or against you, between the time you place the order and when it is filled.
In general, Successful Investors should use market orders when buying or selling widely traded shares. That’s because the market-order risk of occasionally paying too much is more than offset by the limit-order risk of missing out on your best ideas.
What are some of the best Canadian stocks you’ve added to your portfolio? How did you recognize them as good additions?
This article was originally published in 2018 and is regularly updated.
