Your best portfolio pick will almost always come from a high-quality stock with a history of paying dividends

Investing is relative, not absolute. It’s an art, not a science. Every stock offers a balance of risk and potential reward. Above all, you’ll want to make sure that your best portfolio pick is part of a portfolio that suits your financial circumstances and temperament. That means a portfolio of high-quality stocks, spread out across most if not all of our five main economic sectors, with limited exposure, if any, to the broker/media limelight.

Once you have built a portfolio that answers that description, instead of continually tinkering with yours, it’s better to focus on staying up to date with news about the stocks you own, rather than predictions.

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Well-established companies are the key to profitable and low risk investments

Instead of moving between extremes of risk, 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. That’s not to say that there won’t be surprises that affect every company in a particular industry. But well-established, safety-conscious stocks have the asset size and the financial clout—including sound balance sheets and strong cash flow—to weather market downturns or changing industry conditions.

High dividend stocks are a sign of investment quality

Some good companies reinvest profits instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks. 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.

An option for best portfolio pick: Income stocks that have consistently paid dividends for many years.

When you pick the best income stocks, you are, for the most part, investing in the safest and most secure companies. That’s in large part because of the dividends that the best income stocks pay. 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 dividends or it doesn’t.

A best portfolio pick will often have hidden assets

The best time to find hidden assets is when they’re still hidden, long before the company begins taking steps to profit from them. Understanding and seeking out hidden assets while you’re evaluating a stock can add enormously to your profits in the course of an investing career. But you need the patience to profit from them because they can stay hidden for a long time after you buy.

Hidden assets can also cut your risk. Stocks with hidden assets are likely to hold up better than those whose assets are easier to spot because they are the last stocks that experienced, successful investors sell. When times are good, on the other hand, stocks with hidden assets tend to do better than average. Good times give them opportunities to put their hidden assets to work.

Financial factors to look for in the best stock picks

• 5 to 10 year history of profit.
• 5 to 10 years of dividends.
• Manageable debt.

Safety factors to look for in the best stock picks

• Industry prominence if not dominance.
• Geographical diversification.
• Freedom to serve (all) shareholders.

Survival and growth factors to look for in the best stock picks

• Freedom from business cycles.
• Ability to profit from secular trends.
• Ownership of strong brand names and an impeccable reputation.
• Spinoffs are often undervalued stocks in disguise.

How to successfully invest in stocks: Build a diversified portfolio

Always maintain a diversified stock portfolio—and avoid the temptation of trying to pick hot stocks or sectors.

Different investors may be more comfortable holding a larger or smaller number of investments in their portfolios, including stocks, mutual funds or exchange-traded funds (ETFs). Here are some tips on diversifying your stock portfolio:

• When it comes to a diversified stock portfolio, stocks in the Resources and Manufacturing & Industry sectors in general expose you to above-average share price volatility.
• Stocks in the Utilities and Canadian Finance sectors entail below-average volatility.
• Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and the more stable Canadian Finance and Utilities companies.

Most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

Are you surprised by your best portfolio pick, or did you have high expectations for the stock when you bought it?

Any stock could be your best portfolio pick if it’s the right one for you at the time. But what would you tell new investors looking for the “best” picks?