Blue chip stocks paying a dividend are typically good stocks to buy because that provides you with tangible proof of their investment quality

Blue chip companies are very often good stocks to buy. They have a history of earnings and, in most cases, a history of sustainable dividends. They have established their value over the long term. Like all stocks, they can fluctuate widely, and many suffer in a long-term market downturn, but they offer a higher probability of long-term gains.

We feel most investors should hold a substantial portion of their investment portfolios in stocks of blue-chip companies. These stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above-average growth prospects compared to alternative investments.

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If you find good stocks to buy for your portfolio, then you should probably buy them now

There’s no easy answer to a buy-now-or-wait dilemma. At times it may pay to hold off—for instance, a company’s stock will often rise when it announces a stock split, then fall after the split takes effect.

In the end, our stock trading advice is that if a stock is truly worth investing in, you should be willing to buy it at current prices, even if that means you run the risk of having to sit through a 5% to 10% setback. Before it puts on its next 5% to 10% setback, after all, it may first go up 50% to 100%.

A history of paying dividends is one characteristic shared by good stocks to buy for your portfolio

The best dividend stocks will not only continue to pay and increase their dividends, but will also have growing sales and earnings, sound management, a strong position within their industries and, often, hidden assets waiting to be unlocked.

However, a long-term record of dividend payment is the prime measure of strength and stability. With weak or troubled firms, the dividend is often the first thing to be discarded, if it was ever paid at all. We assess these points by tracing a company’s dividend record over the past 10 years.

Good companies to invest in offer stability and more

It’s realistic to assume dividends from blue chip companies will continue to contribute around a third of your total return. In addition:

Dividends can grow. Stock prices rise and fall. Interest on bonds holds steady at best. But dividend-paying stocks like to ratchet their dividends upward—hold them steady in a bad year, raise them in a good one. That gives you a hedge against inflation.

Dividends are a sign of investment quality. Some good companies reinvest profit instead of paying dividends. But fraudulent and failing companies are hardly ever dividend paying stocks. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

For an added measure of stability, focus on those companies that have maintained or raised their dividends during a recent economic or stock market downturn. That’s because 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.

Realize that some high dividend yields can be signs of dividend stocks to avoid

When looking for stocks with high dividend yields, you should avoid the temptation of seeking out stocks with the highest yield simply because they have above-average yields.

That’s because a high yield may signal danger rather than a bargain if it reflects widespread investor skepticism that a company can keep paying its current dividend.

Dividend cuts will always undermine investor confidence, and can quickly push down a company’s stock price.

Conversely, a track record of dividend payments is a strong sign of reliability and a strong indication that you may be investing in the best long-term dividend stocks.

Good stocks to buy now tend to be good stocks to buy for the long term as well

The best stocks to hold in your portfolio all have one thing in common: They give you reason to believe they might be worth holding on to indefinitely.

Most of these stocks have an established business and a history of sales gains, plus earnings, if not dividends. To put it more simply, these stocks have a clear business plan that seems to be working.

What factors have led you to buy stocks that looked good but ended up leading to losses?

What factors make a stock a good buy in your opinion?