There are a variety of factors to consider when you look for top long-term stocks to buy, including whether they pay dividends, their position in their industry and management strength

One successful strategy for finding long-term stocks to buy is 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.

When you look for stocks with sound long-term prospects, it’s best to focus on shares of quality companies that also have a strong hold on a growing clientele.

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Stocks that pay dividends are some of our most recommended long-term stocks to buy for your portfolio

Dividends are a prime measure of a company’s strength and stability. With weak or troubled firms, the dividend is often the first thing to be discarded, if one was ever paid at all. The successful investor approach identifies reliable dividend payers by tracing a company’s dividend record over the past 5 to 10 years.

There are good reasons companies trumpet their dividend hikes. They are more than a reward to shareholders—they’re a statement of self-confidence by the company. At a minimum, looking at the past 5 years (if not more) should give you a timely reading on the company’s commitment to dividend increases.

A company’s commitment to its dividend is reinforced if management stands behind it publicly.

Long-term stocks to buy: The best stocks benefit from “compounding”

Compound interest—earning interest on interest—can have an enormous ballooning effect on the value of an investment over the long-term. This is especially important for young investors to learn. Note that the benefits of compounding apply to both dividend-paying stocks and fixed-return, interest-paying investments such as bonds. When you earn a return on past returns, including dividends and capital gains, 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.

To profit the most from compounding, you need to pay attention to steady drains on your capital, even seemingly small ones—like high brokerage commissions. If you’re losing (or missing out on a profit of) even 1% a year, it can have an enormous draining effect on your investments over a decade or two. 

A strong balance sheet, industry prominence, and a record of earnings and cash flow are good indicators of safety when you look for long-term stocks to buy

The successful investor approach also looks for a strong balance sheet with a manageable level of debt. How a company spends its money is important, too. Acquisitions can be good, for instance, but too many of them can take a bite out of a company’s cash and push the debt load (and goodwill) to uncomfortable levels.

Companies with a major presence in their industry, and those that also anticipate advances in their industry, adjust to changing conditions and technology. They also withstand strong competition and have the confidence to pay dividends year after year.

Note that a consistently strong balance sheet can only be maintained with a regular stream of revenue and earnings to generate steady cash flow.

Bonus Tip: A high dividend yield can be misleading, so look beyond it when seeking dividend-paying investments

Dividend stocks offer investors a measure of security. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

However, it’s important to avoid judging a company based solely on its dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price).

That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a dividend stock’s yield could be high simply because its share price has dropped sharply because investors anticipate a dividend cut.

That’s why we recommend you look beyond dividend yield when making investments in dividend stocks, and, as mentioned earlier, look for those companies that also have well-established businesses and a history of building revenue and cash flow.

What’s the primary factor you look for when you invest in a stock you’re planning to hold over a long period of time?

What changes have you made in your long-term strategy since you began investing?