What to Invest in to Make Money: We recommend not just high-quality stocks, but a well-balanced portfolio as well

This is our view on what to invest in to make money: a well-diversified portfolio of high-quality common stocks.

And here’s how to do that.

What to invest in to make money: Blue chip stocks

How Successful Investors Get RICH Learn everything you need to know in 'The Canadian Guide on How to Invest in Stocks Successfully' for FREE from The Successful Investor. How to Invest In Stocks Guide: Find 10 factors that make your investments safer and stronger.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

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 “blue chip” label. That’s because some blue chips only get their reputation through a strong public relations effort or by being in the right industry or business situation at the right time and place.

When assessing if blue chip companies are good companies to invest in, you need to ask: What are they doing to remain vital? These companies hold strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.

Stocks like these give investors an additional measure of safety in volatile markets. And the best ones—the top 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 dividend yields (annual dividend divided by the share price) and promising growth prospects.

What to invest in to make money: A diversified portfolio  

Portfolio diversification with the Successful Investor approach will enhance your potential for long-term gains.

If you diversify as we advise, you improve your chances of making money over long periods, no matter what happens in the market.

As part of their portfolio diversification strategy, most Successful Investors should have investments in most, if not all, of the five main economic sectors. The proper proportions for you depend on your temperament and circumstances.

If you’re an income 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, even during downturns.

As a more-aggressive investor, you might want to increase your portfolio weightings in Resource or Manufacturing stocks. However, in particular, you’ll also want to spread your Resource holdings out among oil and gas, metals and other Resource stocks for diversification and exposure to a number of areas.

By diversifying across most if not all of the five sectors, Successful Investors avoid overloading themselves with stocks that are about to slump simply because of industry conditions or investor fashion. You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.

What to invest in to make money: Canadian stocks that pay dividends

Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends are eligible for the dividend tax credit in Canada. This dividend tax credit—which is available on dividends paid on Canadian stocks; they must also be held outside of an RRSP, RRIF or TFSA—will cut your effective tax rate.

This means that dividend income will be taxed at a lower rate than the same amount of interest income (Investors in the highest tax bracket pay tax of around 29% on dividends, compared to 50% on interest income—investors in the higher tax bracket pay tax on capital gains at a rate of 25%.)

One of the best ways of picking a quality Canadian dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings and issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one thing that all the best dividend stocks have in common. 

For a true measure of stability, focus on companies that have maintained or raised their dividends during economic and stock market downturns. These firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.

Bonus Tip: Dividends compound, just like interest

Compound interest is earning interest on interest. Over time, your long-term investments will earn more and more money from the effects of compound interest. Compound interest is what makes investing a worthwhile pursuit.

Note that the idea behind compound interest can also be applied to dividend-paying equity investments like stocks as well as to fixed-return, interest-paying investments like bonds. When you earn a return on past investment returns (including dividends), the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate. However, it’s very important to keep an eye on investments or expensive fees that affect the amount of interest you earn. Even 1% a year can be huge drain on your portfolio.

What types of investments have made consistent money for you?

What blue chip stock have you held onto the longest?