Learning how to spot the top blue-chip companies, dividend-paying stocks, and ETFs will help you choose the best way to invest $100K

If you’re looking for the best way to invest $100K, we recommend using our Successful Investor approach.

One key part of our three-part investing program is to diversify—spread your money out across most, if not all, of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities. Diversifying your stocks across the five sectors is more than just a safeguard. That will significantly improve your chances of making money.

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The best way to invest $100K: Blue chip stocks

The best companies to invest in have strong business prospects and offer low risk with high return potential. Many good companies to invest in acquire a blue-chip reputation by displaying the qualities that the definition suggests. You can 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.

Blue chip companies are typically defined as firms whose stocks have a national reputation for quality, reliability and the ability to operate profitably in good times and bad. However, the problem is that “reputation” plays a key role in the definition.

In plain English, when you ask, “what are blue chip companies?” the answer is usually a company you already know. Companies that have stood the test of time and pose little risk to an investor even in the worst of financial times, are blue chip companies. IBM and Apple are two good examples.

When assessing the best blue-chip companies to buy with your $100,000, 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 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.

The best way to invest $100K: Dividend-paying stocks

Dividend-paying stocks are stocks that pay out a regular dividend to a company’s shareholders. Top dividend-paying stocks disperse dividend payments on a predetermined schedule, such as monthly, quarterly or annually.

If you stick with top-quality, high dividend paying stocks, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

Good dividend stocks are a valuable component of any sound investment portfolio. But note, though, that when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.

A track record of dividend payments is a strong sign of reliability and a strong indication that investing in the stock will be profitable for you in the future.

The best way to invest $100K: Exchange traded funds (ETFs)

We still feel that investors will profit the most with a well-balanced portfolio of high-quality individual stocks, but ETFs can also play a role in a portfolio. Here’s a key factor for finding the best performing ETFs.

The best ETFs closely track an established index. This passive style keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.

We recommend buying ETFs that practice passive fund management, in contrast to the active management that conventional mutual funds provide at much higher costs.

Using a sector rotation strategy is not the best way to invest $100K

Instead of portfolio diversification approaches like ours, some investors practice “sector rotation.” That’s where you try to predict which sectors will outperform other sectors. But trying to pick winning sectors—and stay out of other sectors—seldom works over long periods. That’s because you need to guess right three times to succeed.

You have to pick the top sectors, then pick the stocks that will rise within those sectors, then sell before the sector stumbles. It’s virtually impossible to consistently succeed at all three over long periods.

Do you think the best way to invest $100K is through diversifying among the five major sectors, or do you prefer to put your money in any fitting investment, regardless of the diversification? Why do you utilize this strategy?

What investment strategy would you recommend to a young investor with $100K to spend? What mistakes have you made that they could learn from?