What are good quality stocks?

It’s like anything else you buy – there are huge differences! You can buy cheap shoes or expensive shoes. You can buy poor quality shoes or very high quality shoes. You can overpay for shoes because they are trendy or you can underpay for shoes at the Thrift stores. And that’s just shoes!

Try the grocery store. I even find the choices overwhelming there. As a kid, we could chose between puffed wheat, corn flakes and rice krispies (or good old oatmeal for porridge). Now there is an entire aisle dedicated to cereal. It makes my head spin.

I suspect that as an investor, that is probably how you feel about the stock market. Unlike cereal that you are going to be buying on a weekly or monthly basis, good quality stocks should always be bought for a long term. That’s when you really see the benefits of your investments.

There are over 1500 publicly traded companies on the Toronto Stock Exchange and over 4000 publicly traded companies in the US and we haven’t left North America! No wonder we feel so overwhelmed. So how do we determine quality?

How large is the company? How many years has it been in business? How profitable is it? Do their profits increase most years? What does it do with profits – reinvest? Dividends to shareholders?

The largest company listed on the Toronto Stock Exchange was founded in 1864. Its market capitalization (it’s value) is OVER $134 BILLION and it had a net profit of $10. 5 BILLION in 2016 up to $12.077 BILLION in the year ending October 31, 2022. And no, these aren’t typos – its billions, not millions. And finally, their dividends are just over 4%.

Twenty years ago, their shares were worth around $30; today they are in the $130 range. They have always paid a dividend which is a percentage of the share price. If you had purchased 100 shares ($3,000) twenty years ago, you would have been paid a dividend of $120 that year. As the share price increases, so do the dividends (remember, the dividend percentage is on the current share price, not the price you paid). Without doing anything but holding on to those shares, your annual dividend today would be $520 (100 shares x $130/share x 4%). Basically, the dividend payment would be close to the interest payment you’d get on your GIC at the bank, right? So why would you take any risk? Here’s why - your GIC at the bank LESS the interest payments is worth $3,000; your shares LESS the dividend payments are now worth . . . . . . . . . . $13,000.

Have you figured out what company I’m talking about? If so, do you think you are taking a lot of risk owning their shares? I’ll save your google finger by telling you the company is RBC – and its Canada’s largest bank; its stock symbol is RY if you want to do more research.

RBC and all the chartered banks, the large insurance companies, the railroads to name a few, have more features that add to their quality. I will continue explaining some of those features in the next post.

In closing, I have a little trouble thinking I’m taking a lot of risk owning these types of companies. We seem to think financial risk means losing money in the stock markets. A bigger risk to me is outliving your money – and that’s going to be ANOTHER post! If you are only investing in guaranteed products – I believe the only guarantee you are getting is a guarantee that you will never be able to afford to retire. You will be “making your money work for SOMEONE ELSE”. I didn’t come this far or work this hard for someone else’s benefit. Will you?