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Shortcuts To Finding Great Companies To Invest In.

Updated on April 30, 2016

There are thousands of companies on the stock exchanges in the US. Thousands more when you consider stocks in other countries. So how do you pick the right ones to buy? How do you know when to buy them? This can be a daunting task since ideally you would read the published financials for each company. Compare them to your estimates and then ultimately to each other. Do you have the time to read the published financials for thousands of companies to find one to buy a few shares of stock? Most people do not. So how can you pick stocks? Here are a few steps to save countless hours finding the right stocks.

Step 1: Stick with blue chips.

What is it?

Blue chips are the companies that have been around for a long time. This is your Coca-Colas, Johnson & Johnsons, and Exxons. But you don’t have to limit yourself to well known companies. Take for example, Archer Daniels Midland is an agriculture company that has been raising its dividend every year for 41 years. Genuine Parts Co. makes auto parts and has been raising its dividend every year for 60 years. Both companies continue to make money and will likely make strong profits well into the future.

How to do it.

One way to do it is to look at all the companies that have been raising their dividend every year for at least 25 years. There are a lot of sources for this. I like Dave Fish’s U.S. Dividend Champions posted at dripinvesting.org. At that link they also have lists for the Canadian, UK and other stock exchanges. I download the excel file. In that U.S. Dividend Champions list look at the Champions tab. Virtually any of those companies would be great long term buys.

Step 2: Make sure they’re paying their owners.

What is it?

You want a company that is paying its owners. This means that as soon as you buy the stock you’ll start getting dividend checks. This is profit that the company is sharing with you as an owner. You can use this dividend check to reinvest into the same stock, buy other investments or pay your bills. Some companies pay different dividend amounts and their dividends grow at different amounts. Find one with a good balance for a strong future.

How to do it.

Once I have this list I look at several things. One is the Dividend Yield (that’s column I as of this writing) another is the 5 and 10 year dividend growth rate (that’s columns AN and AO). Personally I look for a company that has a dividend yield of about 3% or higher and a dividend growth rate that is higher than inflation. This means that historically the growth of the dividend has kept up with inflation so it is likely that it will in the future. After narrowing the list down like that you will find that the list goes from over a hundred to about 15.

Step 3: Find one that is undervalued.

What is it?

Once you’re down to this list of 15 or so stocks you could stop here and buy any one of them and be fine. If you’re looking to buy a lot of stocks you could buy them all and diversify. But to have the greatest chance to make more money you can find the ones that are currently undervalued. Even if something is a great buy it’s always better if it’s on sale also.

How to do it.

There are several techniques that I use to find stocks that are undervalued. One that I find quick is to look at the PE ratio compared to its high, low and median PE ratio. If a blue chip stock is selling for less than its median PE ratio I consider it on sale. One thing to keep in mind is that this doesn’t work well for oil stocks. Again, there are several sources for this. One is gurufocus.com. Type the ticker symbol into the box and click on PE Ratio on the stocks summary screen. It’ll give you the low high and median.

This is one method for picking solid stocks. There are as many methods as there are investors. Even after narrowing it down like this do your due diligence to make sure that the company is good and that there wasn’t an error in the tools. I can’t stress enough the importance of due diligence before making a final purchase. This method is based on historical data, and current financial reports will show if the company is on a path to continue that trend. But this method can help narrow the list of companies to research from thousands to just a handful. This method is also about reliable sustained growth. It isn’t about hitting the next big thing. It’s hard to consistently find the next big thing. It’s usually pretty easy to pick solid companies that will continue to make money for decades. And that’s what this is about. Picking companies that you can buy the stock and hold for a long time. Maybe even pass down to your children.

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