A mix of growth, value, and dividend-paying Canadian stock picks will let you build a diversified portfolio with strong long-term prospects

Selecting Canadian stock picks for a diversified portfolio begins with spreading investments across most if not all of the five main economic sectors. As well, look to diversify even further by holding some growth investing stocks and some value investing shares. Some of those as well should also be income-producing stocks that have a history of paying a dividend.

All in all, a well-diversified Successful Investor stock portfolio should be tailored to your personal investment goals and temperament.

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How to select the right Canadian stock picks for value investing

Value investing is an investment approach that follows the basic model set by the pioneers of conservative investing, Benjamin Graham and David Dodd. Value investing is also the preferred investing method of Warren Buffett, who’s a prominent and successful modern day investor.

At the core of the value investing approach is the ability to identify well-financed companies that are well-established in their businesses and have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does. At the same time, they are cheap in relation to measures such as price/earnings and price/sales. Value investors typically have a long-term mindset when it comes to investing.

Value stocks are stocks trading lower than their financial fundamentals suggest. They are undervalued, and have the potential to rise as more investors realize their true worth.

If you stick with the highest-quality value stock picks, we think you will achieve above-average long-term portfolio gains.

How to select the right Canadian stock picks for growth investing

Growth stocks are companies that have above-average growth prospects. They are firms whose earnings have increased at a faster rate than the market average. Their growth is likely to remain above average for years or decades. It is often the case that they pay small dividends or none at all. Instead, they re-invest their cash flow in the business, to promote their growth.

Although these stocks can be more volatile than value picks, they often make good long-term investments. They may be well-known stars or quiet gems, but they do share one common attribute—they have grown at higher-than-average rates within their industries, or within the market as a whole, for years or decades.

Growth investing focuses on trying to identify and buy rising stocks when they have further growth ahead.

These stocks may trade at higher-than-average multiples of earnings, cash flow, book value and so on. Ideally, though, as mentioned, they also have above-average growth prospects, compared to other investments.

How to select Canadian stock picks for more income

Income stocks are stocks that produce above-average income, usually in the form of dividends.

An income stock usually has two distinct traits. The first is a high dividend yield. For example, stocks with a dividend yield higher than, say, 3% would typically be attractive to an income-seeking investor. Investors should note that a very high dividend yield can also be a warning sign of trouble (such as an imminent dividend cut).

Apart from a high dividend yield, you should look for a second trait: stocks that have a long history of paying (and raising) their dividends. For a true measure of stability, focus on those companies that have maintained or even raised their dividends during economic downturns.

If you’re an income stock investor, you may wish to place more emphasis on Utilities and Canadian banks. That’s because these firms generally pay high, secure dividends, and have long histories of raising their payments.

How to develop a diversified portfolio with Canadian stock picks

Your Successful Investor portfolio strategy should begin with a fundamental piece of advice that we underline frequently and referred to earlier. Spread your money out across most if not all of the five main economic sectors (Finance, Utilities, Manufacturing, Resources, and the Consumer sector). The proportions should depend on your objectives and the risk you can accept. The Finance and Utilities sectors involve below-average risk. Manufacturing and Resources tend to be riskier, and the Consumer sector is in the middle.

We continue to recommend that Canadian investors diversify part of their portfolio (up to 30%, say) in well-established U.S. stocks. That’s because the U.S. market features major multinational opportunities that simply aren’t available anywhere else. As well, many U.S. firms are unique world leaders.

One of the worst things you can do is invest so that your portfolio would suffer a great deal due to a localized downturn in any one city, state or province. Ideally, your portfolio should give you exposure to much of Canadian if not North American economies, plus some international exposure, if only through North American multinationals.

Follow our three-part Successful Investor approach for Canadian stock picks that offer the most benefit with the least risk

Limit your investment risk by following our three-part Successful Investor strategy:

1. Invest mainly in well-established companies;
2. Spread your money out across most if not all of the five main economic sectors
3. Downplay or avoid stocks in the broker/media limelight.

Have you considered investments in the marijuana industry as one of your potential Canadian stock picks, or do you feel, as we do, that the market is too speculative?

How do you balance your portfolio to include low-risk Canadian stock picks with stocks that have more risk, but higher potential returns?