Three Simple Ways to Spot a High-Quality Stock

You’ve likely heard the old adage about sticking to high-quality stocks.

But what exactly are high-quality stocks?

When investment professionals refer to high-quality stocks, they’re referring to those of companies that have proven their ability to deliver strong and steady results over the long term. Following are three ways to spot such companies:

High ROE: Earnings don’t tell you how a company’s doing, but return on investment (ROE) does. ROE measures how much profit a company has earned relative to what shareholders have invested. For example, if a company generated a net income of $13 billion over a one-year period and shareholders invested $63 billion in the company, its ROE would be 20%. Companies with ROEs of 15% or higher are considered very efficient.

Steady Dividends:
Companies that routinely pay generous dividends are clearly generating a healthy cash flow. But companies don’t necessarily have to pay high dividends to be strong. They just have to have enough general cash flow to be able to pay dividends if they want to. This is sometimes the case with technology companies.

Good Growth Prospects: High-quality stocks tend to have competitive advantages that can keep rivals at bay – and those advantages aren’t always clear. A fast-food chain may not seem to have an advantage, given that there’s a fast-food chain on just about every corner, but if the company has significant real estate holdings, the picture may change.