Discover how to pick companies to invest in by considering these key factors including a history of sustainable dividend payments

We continue to think investors will profit most—and with the least risk—by buying shares of well-established companies with strong business prospects and strong positions in healthy industries.

When assessing how to pick companies to invest in for maximum gains, you need to ask: What are they doing to remain vital? As well, do these companies hold strong positions in healthy industries? They should also have strong management that will make the right moves to remain competitive in a changing marketplace.

Looking for keys to how to pick companies to invest in? Start with blue chip stocks

You can still look at blue chips as the strongest and most secure stocks on the market. Just be sure you look at the stock’s qualities and not just at the label. That’s because some blue chips only get their reputation through a strong public relations effort or by having been in the right industry or business situation at the right time and place.

Many top blue chip stocks, however, give investors an additional measure of safety in today’s volatile markets. And the best ones—the good companies to invest in—offer an attractive combination of low p/e’s (the ratio of a stock’s price to its per-share earnings), steady or rising dividends and promising growth prospects.

Look for these positive factors when you are determining how to pick companies to invest in

Consider earnings, dividends and other factors in making decisions. They matter far more than short-term stock-price trends. Stock prices rise and fall. But strong dividend stocks like to ratchet their dividends upward. Even during market downturns, the last thing a well-established company wants to do is lower its dividend payouts. When times are good, strong companies will raise their dividend yield.

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Here are some other key factors to watch for:

• Freedom from business cycles. Demand periodically dries up in “cyclical” businesses, such as resources and manufacturing. That’s why you need to diversify. Invest in utility, finance and consumer stocks, in addition to more cyclical resource firms and manufacturers.
• Ability to profit from secular trends: These trends outlast ordinary business booms and busts, because they reflect ongoing social change. Renegotiated trade pacts and rising environmentalism are just two examples of secular trends.
• Ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses, and will try their new products.

In addition to getting to know the companies you invest in, you should also get to know the industries that stocks operate in. Some industries are more volatile than others. Knowing that can alleviate anxiety and build confidence in your investments. Don’t invest in industries you’re not familiar with, and you’ll steer clear of many overvalued stocks.

Safety factors to watch for:

• Industry prominence if not dominance. Major companies can influence legislation, industry trends and other business factors to suit themselves. Minor firms, on the other hand, don’t have that power.
• Geographical diversification. Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.
• Freedom to serve (all) shareholders. High-quality value stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies.

Don’t attach too much importance to shorter-term market movements when you are zeroing in on how to pick companies to invest in

The market goes up around two thirds of the time over long periods. Market rises coincide with lots of things.

We recently saw a research study that described three kinds of market downturns—V-shaped, U-shaped and L-shaped. In the V’s, the market goes down quickly and rises back up just as fast; in the U’s, the market goes down, stays down for a while, then goes back up; in the L’s, the market drops sharply, then goes sideways for a lengthy period.

Supposedly this classification helps you sort through possibilities. It doesn’t add any value that we can detect. In fact, it’s an example of what we call “mental chewing gum.” It has about as much value as an investment technique as chewing gum has as a form of physical exercise.

You can learn something about the market outlook by studying past market movements, but it takes more than spotting coincidences. You have to look into what caused the market to do what it did in the past. You may come across a similar cause/effect relationship in the future.

Use our three-part Successful Investor approach to guide you in how to pick companies to invest in

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.

How discouraged are you by the  downward movement of your stocks as part of an overall market correction?