7 Steps to Pick the Best Stocks
In today’s choppy market climate you need all-weather stocks.
I call these stocks all-weather because they’re suitable for most every investor in all market conditions. But they are especially strong performers when stock markets turn volatile, as things are right now.
In my book, high-quality dividend stocks are your best defense against turbulent times. They offer you an outstanding combination of steady income through quarterly dividend payments plus market-beating long-term performance.
In short, I search for companies with the following seven characteristics:
- Dominant Business: An established company with a market cap of at least $10 billion.
- Consistent Dividends: A dividend yield equal to, and preferably higher than, that of the S&P 500.
- Cash Flow Doesn’t Lie: Consistently positive cash flow to sustain dividends and grow the business.
- Follow the Peter Principle: Invest in businesses that are easy to understand, and be able to explain why you buy so a fifth-grader can understand.
- High-Quality: Insist on companies with an S&P Quality Ranking of B or better, and preferably A.
- Improving Prospects: Buy the right stock at the right time, when earnings estimates are rising.
- History Rhymes: Look closely at the company’s historical results over the past 10 years to make sure it has consistent sales, profits and, most important, dividends.
With these seven steps, you can build a balanced portfolio of quality stocks from different sectors, allowing you to sleep well at night.
But how do you go about screening for stocks with these attributes?
Simple. The power of the internet has leveled the playing field for individual investors today. You can easily do the number crunching online nowadays. Many financial websites, including YahooFinance.com, feature user-friendly stock-screening tools that allow you to plug in many of my favorite factors listed above to help guide you to quality stocks.
Also, many online brokers offer even more sophisticated stock screeners. Some are free and some require you to have a brokerage account with them. These include Fidelity, Schwab and Merrill Edge, the online broker owned by Bank of America Merrill Lynch.
Out of the seven guidelines I listed above, typically you’ll find that Nos. 1, 2, 3, 5 and 6 can easily be plugged into most online stock screeners.
Nos. 4 and 7 are a bit more subjective, meaning you’ll have to do a little more digging to learn more about the company’s historical financials and company culture.
But hey, that’s what investing is all about, digging deeper to uncover the hidden gems most other investors miss.
As Peter Lynch once said: “The worst thing you can do is invest in companies you know nothing about.”
Remember, these seven rules of thumb are NOT meant to be taken as gospel. But they are a great way to initially narrow down the field of contenders to a manageable list.
Here’s to growing your wealth,
Chief Income Expert