Look for quality, consistency, and a history of success to find the best Canadian stocks to buy and hold for long-term profits

We think that most investors will maximize their returns by building a well-balanced portfolio of high-quality, mostly dividend-paying stocks and holding them for a long time.

As long-time readers know, I could go on about this subject at length. One thing to consider is that the market’s heightened volatility doesn’t make it easier for in-and-out traders to make money—it makes it harder. Then too, there is no denying the immediate appeal of taking a profit. However, most successful investors find over long periods that much of their profit comes from a handful of their best investments – stocks that went up much more than they ever expected. If you are too quick to take profits, you’ll wind up selling your best picks when they are just beginning to rise.

Note our refinement, though: Rather than “buy and hold,” we prefer a “buy and watch closely” strategy.

A buy-and-watch-closely orientation can be extremely profitable in the long term. That’s because you are more likely to hang on to your best picks, rather than selling them prematurely. After all, your best picks are those that do way better than you ever expected. Frequent trading will lead you to sell your best picks when they are just getting started. It also pushes up your commission expense.

Keep in mind that if you try to practice “buy and hold,” you need to be particularly conscientious about investing solely in well-established companies. Even then, you need to continually re-evaluate your holdings.

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Look to blue chips as some of the best Canadian stocks to buy and hold for maximum gains

A company with a long-term record of paying dividends is generally one that is most deserving of the “blue chip” label in its traditional sense. Dividends, after all, are much more stable than earnings projections. More importantly, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

The best blue chips offer both capital gains growth potential and regular dividend income. Be aware, though, that investors should avoid judging a company based solely on its dividend yield.

That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a dividend-paying stock’s yield could be high simply due to the fact its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut.

Recognize that the best Canadian stocks to buy and hold can include growth stocks as well as value picks

Although Canadian growth stocks can be volatile, they can make good long-term additions to a portfolio. They may be well-known stars or quiet gems, but they do share one common attribute—they are growing at a higher-than-average rate within their industry, or compared to the market as a whole, and could keep growing for years or decades.

When considering specific investments and looking at buying growth stocks, we start by putting all the important information we know about a company into perspective. For example, its new invention may be a marvel, but how does it compare to what the competition is doing? Its new project sounds impressive, but how much impact will it really have on the company’s profit? Its debt sounds high—will the company be able to keep up its agreed-upon interest and principal repayments?

Use our three-part Successful Investor approach to find the best Canadian stocks

We believe that high-quality stocks are your best choices in a portfolio. To find those stocks, and build a sound portfolio, start with our Successful Investor philosophy:

1. Invest mainly in high-quality, well-established companies, with a history of earnings if not dividends;
2. Diversify across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
3. Downplay or stay out of stocks that are in the broker/media limelight.

When you find the best Canadian stocks to buy and hold, here are some tips on what price you should pay

For many investors, buying stocks involves a two-part decision. First, they decide which ones to buy, then they decide what price they want to pay. Most want to buy, say, 5% to 10% below current prices.

These investors often explain that they are simply looking to buy stocks like a smart consumer buys a car. However, the stock market is more efficient than the car market, as an economist would put it. To get a lower price on a stock, you have to wait for its price to come down.

If you always try to buy below the market, you’ll always get a “fill” on stocks with hidden flaws. They’ll always come down into your buying range…and they’ll keep on falling.

But you’ll never get to buy the other kind of stock—the kind that keeps going up. They’ll always seem too expensive, and they’ll go on to get even more expensive. But you need a few of these ever-more expensive stocks to offset the losses from those that get cheaper and cheaper.

What is the biggest mistake you’ve made with stocks that you bought and held onto?