Quality investing is a stock market approach that invests in large, well-rounded, efficiently managed companies. These types of businesses (colloquially known as “blue chip” companies) are industry leaders that provide moderate, dependable growth and interim income via reasonable dividends.
Why would quality stock investing be right for you?
Quality stock will let you invest in:
- Large, well-established businesses that are household names.
- Market leaders in their sectors and industries.
- Robust financial health with high revenues and steady earnings.
- Reliable dividend payments, around the market average.
- Sustainable, measured overall growth.
- A proven history and safe future prospects.
What are the most important fundamental factors for quality investing?
These types of companies tend to meet the following criteria:
- Market cap – The largest, or among the largest, businesses in their industries, sectors, or the markets as a whole.
- Revenue – Income at the top of the range for their industries and sectors; measured in the billions.
- Earnings and growth – Reliable earnings compared to their peers; steady, year-on-year growth in earnings.
- Dividend yield – Around the market average for dividend yields (the average dividend in the Dow Jones Industrial Average is 2.5-3%).
- Price / Earnings Growth (PEG) – Aim for a PEG of 1 or less.
What are some examples of quality businesses?
The corporations that make up the Dow Jones Industrial Average or the upper parts of the S&P 500 are good candidates for quality investing. This includes companies like Disney, Microsoft, Apple, Wells Fargo, JP Morgan, Johnson & Johnson, Amex, and Visa.
When should you sell this type of investment?
These types of businesses aren’t about to disappear and they will continue to generate good revenue, earnings, and dividends year after year. Unless you have a pressing need to sell these stocks, you can keep investments in quality businesses indefinitely and enjoy the income from the dividends.
What are your expected returns?
- Stocks vary significantly in performance, depending on the company, industry, sector, and other market values.
- Investments in quality businesses are meant to produce solid, not spectacular, returns without an enormous amount of risk.
- Over the long term, you can expect returns largely similar to the market as a whole (together, these businesses make up a large part of the value of the overall market).
- Because you’re likely to hold these stocks for an extended period, most of your realised income will be from dividend payments.
What are the drawbacks of quality investing?
- You should not invest in these types of businesses over the short or medium term as it is possible you will lose money.
- Remember that you should diversify your quality investing by putting money into various quality stocks across different industries and diversifying your portfolio as a whole with other styles of investment.
- Like any stock market investment, quality stocks can be volatile on a day-to-day, week-to-week, and month-to-month basis.
How do you invest in these types of stock?
You can buy directly into quality stocks via your online broker account.