Discover top blue chip stocks by using good investment indicators as a starting point and fill your portfolio with winners you feel confident about

Good investment indicators aim to let you narrow down the range of information that you use to make a decision. And when you come right down to it, you have two ways to try to profit from stock market indicators.

The most common, and the favourite of many investors who are just starting out, is what you might call “the crystal-ball approach.” That’s when you look around for a simple-to-understand, fits-on-a-T-shirt indicator that provides a clear buy-or-sell signal.

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The other way is to use our Successful Investor approach to indicators, which is to use them as specialized tools, rather than decision-making devices.

Use good investment indicators as just one part of your analysis, instead of as a sure-fire crystal-ball

The crystal-ball approach will give you random results—a series of wins and losses. In the long run, however, a random approach to investments is more likely to hurt than to help you, just as in any other area of life.

Before you rely on a market indicator, you need to consider the information it employs and decide if that slice-of-all-available-info is important enough to provide a clue to the outlook for the market or individual stocks.

Look for these good investment indicators to use in your stock search process so you can make the best possible buying choices

A clear business plan that’s working: The best stocks to hold in your portfolio typically all have one thing in common: They give you reason to believe they might be worth holding on to indefinitely.

Most of these stocks have an established business and a history of sales gains, plus earnings, if not dividends. To put it more simply, these stocks have a clear business plan that seems to be working. Note that it’s realistic to assume dividends from blue chip companies will continue to contribute around a third of your total return.

A moderate P/E: The P/E ratio is a widely used guide to value in the stock market. It is the ratio between the per-share “P,” or price of a stock, and its per-share “E,” or earnings. Decades ago, before computers and the Internet, a common rule of thumb was that a P/E below 10.0 was a sign of good value, while a P/E over 20.0 exposed you to above-average risk.

Successful investors treat p/e’s as just one of many tools for conducting stock research, not a deciding factor. This is the approach we follow when we look into a stock’s performance for one of our newsletters.

That’s because by themselves, p/e’s can steer you wrong on individual stocks, and on the market in general. As well, there are lots of stocks out there that are cheap on a p/e basis. But many will remain cheap — their share prices won’t be rising any time soon.

When conducting stock research, you need to ask yourself if a p/e is telling you something by being unusually high or low. In the worst cases, buying stocks with low p/e and thinking that alone means you’re buying value, is often like boarding a train before it derails.

A steady or rising dividend: When you’re looking for income-producing stocks, focus on the best paying dividend stocks for your portfolio.

However, at the same time, the reliability of those dividends is important because a high dividend yield can also be misleading. That’s why we place a high value on a sustained history of dividend payments.

An attractive yield, and especially a very high dividend yield, can give you a false sense of security. That’s because many investors have a tendency to think that dividend income is almost as safe and predictable as bank interest.

It bears repeating, that when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.

Take a broad view while using good investment indicators and you can invest more confidently

You need to look at the overall picture, rather than confine your view to your favourite selection of easily accessible statistical information.

To succeed as an investor, you have to take a broad view in making investment decisions. Technical analysis and other narrow views do sometimes seem to “work” for lengthy periods, of course. But they only work for a minority of the time, and they never work consistently. Instead, they run hot and cold. As with all random events, their successes occur in bunches.

Use our three-part Successful Investing approach to make better stock selections

• Hold mostly high-quality, dividend-paying stocks.
• Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
• Downplay or stay out of stocks in the broker/media limelight.

Which investment indicators do you consider initially before ever make an investment?

Investment indicators can sometimes be wrong, especially if you only use a single indicator. How do you avoid relying on faulty indicators when you make buying and selling decisions?