high quality stocks

Our focus on high-quality stocks has produced major gains for our readers in the past few years. Our choices have done well in the market, but they have also attracted more than our share of takeover bids. That’s because the high-quality stocks we recommend generally offer a combination of high potential and low risk. That’s the main goal of many corporate takeover specialists. Recently, two of our long-time recommendations have agreed to friendly takeover bids. Both deals should wrap up by the end of 2006....

Here are five large funds run by each of Canada’s big-five banks. Each holds the kind of conservative, well-balanced portfolios of high quality stocks we like. All five have a high weighting in Financial services and Energy stocks. However, they stick with high-quality issues with sound fundamentals, so these concentrations don’t add a lot of risk. Each has its quirks, but overall they are well positioned for low-risk returns. TD CANADIAN EQUITY FUND $30.99 (CWA Rating: Conservative) (TD Asset Management, P.O. Box 7500, Station A, Toronto, Ontario. M5W 1P9. 1-800-463-3863; Web site: www.tdcanadatrust.ca. No load — deal directly with the bank) uses a “bottom-up” approach (using fundamentals such as earnings, cash flow and low debt) to identify undervalued companies with strong growth potential. TD Canadian Equity Fund’s 10 largest holdings are Manulife Financial, Suncor Energy, Royal Bank, TD Bank, Western Oil Sands, Canadian Oil Sands Trust, CN Railway, Inco, Falconbridge and Teck Cominco....

Dividend reinvestment plans, or DRIPs, are plans offered by some companies that let shareholders receive additional shares of stocks or trusts in lieu of cash dividends. The advent of low cost discount brokerage and on-line investing has reduced the commission cost of investment trades to low levels. Thus, the commission free investing that DRIP investing allows is less of an advantage today than it was in the past. Still, DRIPs can be a good way to slowly build wealth over a long period, for a number of reasons. First, they eliminate the nuisance of receiving small cash dividend payments. Second, some DRIP plans let you reinvest your dividends in additional shares at a 5% discount to current prices. Third, many DRIP plans also allow optional commission-free share purchases on a monthly or quarterly basis....

FIDELITY TRUE NORTH FUND $26.33 (CWA Rating: Conservative) (Fidelity Investments Canada, 483 Bay St., Suite 200, Toronto, Ont. M5G 2N7. 1-800-263-4077; Web site: www.fidelity.ca. Load fund — available from brokers) uses a “bottom-up” approach (using fundamentals such as earnings, cash flow and low debt) to identify undervalued companies. Fidelity True North Fund’s top holdings include high-quality stocks such as Manulife Financial, EnCana Corporation, TD Bank, Sun Life Financial, Canadian National Railway, Canadian Natural Resources, Bank of Nova Scotia, Research in Motion and Talisman Energy. The fund’s breakdown by economic sector is: 31% in Financials, 20.6% in Energy, 14% in Materials, 8.4% in Information technology, 7.4% in Industrials, 6.6% in Consumer discretionary, and 2.2% in Consumer staples....

BMO Dividend and Royal Dividend hold mostly high-quality stocks. These stocks sometimes run into deep trouble and go through lengthy struggles, just like lesser investments. Eventually, though, most solve their problems and go on to thrive anew. Both funds hold a high proportion of their assets in financial services stocks. However, if you must focus on something, finance is a relatively stable sector. If you do invest in these funds, be sure to adjust the rest of your portfolio so these funds won’t overly concentrate your holdings in the financial sector. BMO Dividend and Royal Dividend have both outperformed AIC Diversified Canada over the last year, even though it also has a financial focus. That’s because they hold lots of our favourite high-quality stocks. If you’re looking for income and growth, we prefer these two funds for new buying....

We designed our system to zero in on high-quality stocks with long-term growth potential. That helps us steer clear of companies with big legal problems. Lately, two of our recommendations have dropped sharply due to class-action lawsuits. While these suits are a cause for concern, these two industry leaders should survive these recent setbacks. SHERWIN-WILLIAMS INC. $51 (New York symbol SHW; WSSF Rating: Above average) got as high as $54 in February 2006, but dropped to $37 after a Rhode Island court ruled that the company and two other paint makers are liable for harm caused by lead-based paints. Sherwin stopped making lead paint over 30 years ago, but it and the two other companies could conceivably have to spend over $1 billion to clean up about 250,000 homes in Rhode Island alone. That’s a sizable expense considering that Sherwin earned $463.3 million or $3.28 a share in 2005. However, the court exempted Sherwin from punitive damages. That helped the stock recapture much of the big drop. The stock also got a boost from Sherwin’s improving earnings, which will probably rise to $3.85 a share in 2006. It now trades at just 13.2 times that estimate. The improving earnings also let the company raise its quarterly dividend 22.0%, from $0.205 a share to $0.25. The new annual rate of $1.00 yields 2.0%....

Our three-pronged approach to investment success is particularly well-suited to times like the present, when one particular group of investments (in this case, Resources & Commodities stocks) is making great gains and leading the market higher. Here are our three keys to successful investing: #1. Invest mainly in well-established companies....

FIDELITY TRUE NORTH FUND $26.61 (CWA Rating: Conservative) (Fidelity Investments Canada, 483 Bay St., Suite 200, Toronto, Ont. M5G 2N7. 1-800-263-4077; Web site: www.fidelity.ca. Load fund — available from brokers) uses a “bottom-up” approach (using fundamentals such as earnings, cash flow and low debt) to identify undervalued companies. Fidelity True North Fund’s top holdings include high-quality stocks such as Manulife Financial, EnCana, TD Bank, Sun Life, CN Railway, Canadian Natural Resources, Bank of Nova Scotia, Telus Corp. and Talisman Energy. The fund’s breakdown by economic sector is: 31.2% in Financials, 21.5% in Energy, 14.7% in Materials, 8.2% in Industrials, 7.2% in Telecom, 6.5% in Information technology and 4.3% in Consumer discretionary....

Here are two funds offered by Mackenzie Financial. We rate one as Conservative and the other as Aggressive. But both cut risk by investing in high-quality stocks. UNIVERSAL CANADIAN GROWTH FUND $20.66 (CWA Rating: Conservative) (Mackenzie Financial Corp., 150 Bloor St. West, Toronto, Ont. M5S 3B5. Web site: www.mackenziefinancial.com. 1-800-387-0780; Load fund — available from brokers) holds companies with strong management and sound business prospects. The fund holds fewer than 40 stocks at all times. Top holdings include Bank of Montreal, Manulife Financial, Finning International, Avid Technology, Shoppers Drug Mart, Corus Entertainment, Industrial- Alliance Life Insurance, Edwards Lifesciences, Biosite Inc. and BCE Inc....

Many bank-run funds share common faults: they are run by committees and anonymous bank employees who produce mediocre results, yet they charge high fees. Here, however, are two big funds run by individual managers that hold the kind of conservative, well-balanced portfolios of high quality stocks we like. Each has its quirks, but overall they are well positioned for low-risk returns. TD CANADIAN EQUITY FUND $29.13 (CWA Rating: Conservative) (TD Asset Management, P.O. Box 7500, Station A, Toronto, Ontario. M5W 1P9. 1-800-463-3863; Web site: www.tdcanadatrust.ca. No load — deal directly with the bank) uses a “bottom-up” approach (using fundamentals such as earnings, cash flow and low debt) to identify undervalued companies with strong growth potential. TD Canadian Equity Fund’s 10 largest holdings are Manulife Financial, Suncor Energy, Royal Bank, EnCana, TD Bank, Petro-Canada, Rogers Communications, Bank of Nova Scotia, Falconbridge and Valero Energy....