Topic: Dividend Stocks

Buying the best TSX stocks for your portfolio is easier with these key tips

July 7, 2021|by Scott Clayton

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Investing in the best TSX stocks can help you maximize your returns. Learn here about what we look for when making top picks from the Toronto Stock Exchange

The Toronto Stock Exchange (TSX) is the largest stock exchange in Canada and the third largest in North America. Of note is that the TSX has more oil and gas companies listed on it than any other stock exchange in the world. That’s also reflected in the S&P/TSX Composite Index, commonly called the TSX index. The Toronto Exchange started up on October 25, 1861. The TMX Group operates a number of stock and commodity exchanges, including the TSX.

If you are looking for the bjest TSX stocks available, take a look at the factors we consider and our tips.

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Here are key factors to consider when investing in the best TSX stocks

• We insist on political stability. For example, mineral exploration is risky enough without the threat of expropriation or onerous taxes.
• We look for well-financed stocks with no immediate need to sell shares at low prices, since that would dilute the interests of existing investors.
• We like to see a strong balance sheet with low debt. For junior stocks, we like to see a major partner who can finance a mine, software and so on to production.
• We want to see experienced management with proven ability to develop and finance a new business.
• We avoid stocks trading over-the-counter where regulatory reporting and so on is lax.
• We avoid stocks trading at unsustainably high prices due to broker hype or investor mania.
• We compare the market cap of the stock with the estimated value of its reserves, future product sales and so on.

Blue chip companies are some of the best TSX stocks to invest in for maximum gains

We believe that investors should devote the biggest part of their portfolios to large, well-established “blue chip” securities. At the same time, though, a strong portfolio anchored with blue chip stocks can also offer the opportunity to invest a smaller part of your portfolio in promising smaller companies without subjecting yourself to excessive overall risk. And the best of these smaller companies may one day grow into blue chips themselves.

We advise investors to look for top-performing stocks among blue chip companies that are likely to pay off if business and the stock market are good—but that won’t hurt them too much during those inevitable periods when business or the markets are bad.

In a deep or long-lasting market setback, your blue chip stocks will tend to go down, along with everybody else’s stocks. But we think they will go down less, and recover sooner.

The best TSX stocks to invest in have consistently paid dividends for many years and will likely continue to do so

When you pick the best income 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. 

Use these ratios as a starting point to finding value in the best TSX stocks 

When we look for TSX-listed value stocks to buy, we usually start by looking at a few basic ratios.  For example:

• Low price-to-earnings ratio—a sign of a cheap or undervalued investment.
• Low price-to-book-value ratio—another sign that the stock is cheap in relation to other stocks on the market.
• High dividend yield—the stock’s annual dividend divided by the share price. A high dividend yield could indicate a cheap stock that is set to rise.

Value stocks can test your patience by moving sluggishly for months, if not years. But they can make up for it by rising sharply when investors discover their true worth. 

Remember that some of the best TSX stocks may include spinoffs

When a spinoff (the subsidiary of a business set up as an independent firm) begins trading, it stands to reason that investors will put a low price on it. After all, the spinoff hits the market with a large number of neutral, if not reluctant, stockholders who have limited expectations for it, and who are willing to sell when they get around to it.

One group of investors who might be willing to buy a new spinoff are value seekers. And on the whole, it pays to follow the lead of these seekers of undervalued stocks, and to hang on through months of sluggish trading while reluctant spinoff holders exercise their urge to sell.

Use our three-part Successful Investor approach to guide you in picking the best TSX stocks 

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

Is there a reason you look for stocks on the TSX over other exchanges?

How much importance does the TSX play in your portfolio strategy?