The stock market has historically provided investors with better returns than bonds or holding cash. This makes buying stocks an essential part of a successful investing strategy.
If you’re thinking about taking the leap into the Canadian stock market, there are a few things to keep in mind.
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Stocks: A risk profile
While stocks do offer superior returns over the long term, keep in mind that they can and usually do fluctuate in the shorter term. This means that one must keep a cool head when buying stocks. Never let fear or greed sway you.
This also means that accumulating a well-diversified portfolio of stocks is a useful strategy to spread and minimize your risk. When one group of stocks is underperforming, another might be outperforming, thus evening out your returns.
So, stocks are riskier and have more potential downside, BUT they also have a much greater potential upside. This is why doing one’s homework is essential, and looking for certain key attributes will help mitigate the risk and maximize returns.
Strong balance sheets
The first thing to look into is the company’s balance sheet. You want to make sure that any Canadian stock you invest in has a strong policy regarding using debt responsibly. History has shown that heavily indebted companies can get into trouble pretty quickly. This can quickly destroy shareholder value and place the company in a vulnerable position.
Canadian stock CGI Inc. (TSX: GIB.A) is an example of a company that has used debt conservatively and wisely. This has led to excellent returns and stability. A company like CGI has a solid track record of conservative financial and operational practices. And it’s one that any investor can feel comfortable investing in.
CGI’s strong balance sheet, supported by a return on equity of close to 20% and a double-digit earnings growth rate, illustrates the value of this Canadian stock.
Look for competitive advantages
A company with a strong competitive advantage is also one that tends to create value over the long term. Fortis Inc. (TSX: FTS) is a Canadian utility stock that has this. It’s a leading North American utility that has been benefiting from its leading position in the space, thus driving shareholder value over the long term.
In fact, Fortis stock has been one of the most reliable Canadian stocks in recent history. The company has increased its dividend for 52 consecutive years, and expects its dividend to grow by 4% to 6% annually until the year 2030.
This, coupled with the predictable and low-risk nature of its utility revenues, makes Fortis stock one of the best Canadian stocks for beginner investors. As you can see from Fortis stock’s price graph below, it has returned over 200% in the last 20 years. This equates to a 5.9% annual return. If we add the dividend, this brings the total annual return to approximately 9%, assuming today’s dividend yield of 3.2%. This is pretty good, especially when you consider the low-risk nature of this utility stock.
Don’t speculate
Finally, investing in the stock market should look nothing like speculation. Instead, focus on minimizing risk while maximizing rewards. This means looking for companies that have earnings and generate cash flows. It also means focusing on companies that have a proven business model. Companies like the Canadian stocks I mentioned in this article.
The bottom line
In summary, successful stock market investing requires investors to focus on those companies with proven track records of solid financial and operational performance over time.
