4 Hot Stock Tips

Odds are, you clicked into this article hoping for some stocks that will propel your portfolio to new heights. I'm sorry, but those aren't the kinds of tips I'm offering. But don't be disappointed, because the tips I do have for you can do much more for your portfolio over the rest of your investing life.

Beware of hot stock tips
That's right -- the first hot stock tip is to be wary whenever presented with anything called "hot stock tips." Take responsibility for your own investment decisions, and dig into any stock tips to determine for yourself whether you like what you see. If the stocks have been guaranteed to perform spectacularly, consider running for the hills. There are few guarantees in the stock market, and promises of short-term riches are big red flags.

Don't focus on absolute price
The price of a share of stock in a company is not very meaningful without some context. Too often, people get excited by penny stocks (which are notoriously risky) because they think that being able to buy 3,000 shares of a $1 stock is better than buying 30 shares of a $100 stock. It's not. A $100 stock can become a $200, $300, or $1,000 one, and a $1 stock will often become a $0.50 one.

To draw meaning from a stock's price, compare it with earnings, or dividend amounts, or some other measure. Divide a company's annual dividend amount by its stock price, for example, and you'll get its dividend yield, which will permit you to compare corporate payouts in a more apples-to-apples fashion. Consider, for example, pharmaceutical giant AbbVie, the result of a separation from Abbott Labs, and tobacco-and-real-estate specialist Vector Group. Each was recently paying out $0.40 in dividends quarterly, for an annual total of $1.60. But since AbbVie has been trading around $44 per share and Vector around $16, their dividend yields are quite different, recently about 3.6% for AbbVie and 10.1% for Vector.

Don't overpay
You do want to find great companies in which to invest, but you don't want to pay too much for them. One rough method of assessing how expensive or inexpensive a stock is involves comparing its price with its earnings per share and arriving at its P/E ratio. This can also help you see how seemingly high-priced stocks can actually be more attractive than lower-priced ones.

Shares of specialty insurer Markel, for example, recently traded around $530 per share, and sported a P/E ratio near 18. Burger King Worldwide, with a share price around $19, may seem "cheaper" and thus more attractive, but its P/E ratio recently approached 50. It costs you far more per dollar of earnings than Markel does.

When you're considering any stock for your portfolio, aim to buy only when it seems to be a bargain. That's a stock tip that can help you focus on companies with the best chance of growing.

Don't think it's too early or late to invest
Here's another vital tip: Don't put off or give up on the idea of investing for the long term. Sure, you might be 67 already, but you may well live to be 87 or 97, giving you 20 or 30 years in which you could be enjoying growth in the stock market. Meanwhile, if you're 25, or even just 15, think twice before you put off investing. Check out how powerful time can be in the table below. I'll model growth at 10%, which is roughly the stock market's long-term average annual gain, and I'll also model 3%, to demonstrate the power of time on modest growth rates:

$1,000 grows...

At 3%

At 10%

For 10 years

$1,344

$2,594

For 20 years

$1,806

$6,728

For 30 years

$2,427

$17,449

For 40 years

$3,262

$45,259

For 50 years

$4,384

$117,391

For 60 years

$5,892

$304,482

With whatever companies you consider for your portfolio, be sure to keep the stock tips above in mind.

More investing advice from The Motley Fool
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