If you want the top stocks to invest in for your portfolio, then look for a history of business success, dividend payments, and capital gains benefits

We think that successful investors should confine their buying mostly, if not entirely, to high-quality stocks. That’s because they tend to provide them with the best portfolio returns over long periods.

As we see it, the top stocks to invest in are predominantly blue chip companies that have a history of success, including a record of paying dividends and reputable management.

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The top stocks to invest in should be worth holding indefinitely

Selling stocks because you are bored with them is not the kind of mistake that brings immediate losses, but it’s sure to cut deeply into your long-term returns. The reason is that the market’s top performers can bore you to tears for months or years at a time. However, even though they may go sideways for a long time, these stocks may then set off on a big rise. If you sell out of boredom, you would miss that rise.

Use these three tips to see if you should be selling your stocks in the first place

• Before you sell, ask yourself this: does the stock have a poor fundamental outlook? Or do you want to sell because it just isn’t going up fast enough (see boredom above)?
• Be quicker to sell low-quality stocks, and slower to sell shares of high-quality stocks.
• Avoid portfolio tinkering, especially when it comes to selling stocks that you feel have gone up too far and too fast. To succeed as an investor, you need a big winner in your portfolio from time to time. One key fact about big winners is that they tend to go up further and faster than most investors expect, and they keep doing it for years if not decades.

The top stocks to invest in will have these characteristics in common

If you are looking for the best investments in Canada, stick with top-quality blue chip stocks with sustainable dividends, because the income you earn from those dividends can supply a significant percentage of your total return—as much as a third of your gains (see more on dividends below).

We feel most Successful Investors should hold a substantial portion of their investment portfolios in securities from blue chip companies. This should include stocks that offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Successful Investors should also look for stocks that have above-average growth prospects, compared to their alternatives.

Most of these stocks have well-established businesses and a history of sales gains, plus rising earnings. To put it more simply, these stocks have a clear business plan that seems to be working.

The top stocks to invest in have been paying dividends

When you pick the best high-quality 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. What’s more, dividends are impossible to fake; either the company has the cash to pay dividends or it doesn’t.

Canadian dividend stocks are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers at all times. As you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.

What’s more, Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends can be eligible for the dividend tax credit in Canada. This dividend tax credit will cut your effective tax rate. It also means that dividend income will be taxed at a lower rate than the same amount of interest income.

The top stocks to invest in can benefit from capital gains deductions

One of the main advantages capital gains have over other forms of investment income is that you control when you pay capital-gains tax. This amounts to a very simple and highly effective way of deferring tax—and it’s perfectly legal.

You pay capital gains tax on a stock only when you sell, or “realize” the increase in the value of the stock over and above what you paid for it. In contrast, interest and dividend income are taxed in the year in which they are earned.

In Canada, the capital gains inclusion rate is 50%. That means that capital gains are taxed at a lower rate than interest.

As an added bonus, if you sell after you retire, you may be in a lower tax bracket than you are at an earlier stage in your investing career. In any event, the longer you hold onto a profitable stock and put off paying capital gains tax, the longer all of your money works for you.

As Canadian capital gains tax is lower than the tax on interest and on dividend income, capital gains is a very tax-advantaged form of income.

High, unstable dividend yields can paint a misleading picture. How often have you invested in companies with high yields that ended up losing significant money?