When it comes specifically to dealing with stocks, creating a portfolio does not need to be complicated.
Depending on your goals, any equity market portfolio is well served by a handful of anchor positions. These are stocks representing underlying businesses with long track records of wealth creation. Preferably, they pay dividends, and those dividends can be reinvested into new shares if the income is not required.
All stocks are volatile and inherently risky securities (The Procter & Gamble Company [PG] had an earnings miss in 2000 and took six full years to recover).
While buying and selling stocks are business decisions, the stock market is an emotionally driven secondary market of corporate ownership. Within it, however, investment risk can be managed through diversification and the quality of the underlying businesses themselves.
Choosing five core anchor positions is a good way to start. I’m a huge believer in dividend income; and if that income isn’t required, dividend reinvestment compounds your returns and is a solid path to genuine wealth creation from the equity market.
The following are five examples of stocks that may be considered as core positions.
1. Johnson & Johnson (JNJ): With more than 50 years of consecutive dividend increases, Johnson & Johnson is a dividend-paying blue chip with three main business lines, including consumer products, pharmaceuticals, and medical devices. The company typically announces a quarterly dividend increase in the second quarter of the year.
2. Colgate-Palmolive Company (CL): A well-known producer of toothpaste, soap, deodorant, and dog food, Colgate-Palmolive is a consistent grower of diluted earnings per share and dividends, and a consumer products favorite.
4. 3M Company (MMM): A top conglomerate in industrial, safety, healthcare, consumer products, electronics, and energy, in 2013, 3M paid $1.7 billion in cash dividends and bought back $5.2 billion of its own shares. The company has increased its annual dividend to shareholders for 55 consecutive years.
5. NIKE, Inc. (NKE): Specializing in footwear and apparel, NIKE has offered an annual dividend increase for the last 11 years. In its fiscal second quarter (ended November 20, 2013), NIKE saw an eight-percent gain in sales from continuing operations and a 12% increase in global future orders.
6. Kinder Morgan Energy Partners, L.P. (KMP): One of the largest master limited partnerships and the largest natural gas pipeline and storage operator in the U.S., Kinder Morgan provides oil and gas transmission and storage. The company’s fee-generating assets produce stable cash flows, and its current yield is 6.6%.
Core positions can be accumulated over time and dividend reinvestment is an excellent way to increase your holdings in a cost-effective manner. Positions can be reviewed quarterly.
Now, hopefully there’s room in your portfolio for a handful of more aggressive stocks. These are the speculative positions for capital gains.
Restaurant stocks can be good moneymakers as new chains continually come to market. Large-cap biotechnology stocks always offer lots of action, too.
Pure-play technology is attractive, but not products that are easily commoditized. (See “A Must-Read for Long-Term Equity Investors.”) Likewise, cloud-based software and data optimization companies are quickly growing.
Finally, resource stocks can make money, but they are highly cyclical and always tied to underlying spot prices. Turnaround or penny stocks are time-consuming and not really worthwhile when broader market action is good. But there are always exceptions.
Overall, risk control is more important than potential return, which is why a portfolio of conservative, core positions can easily handle a few high-flyers. At the end of the day, valuations and expectations are all relative. Anything can happen to any stock, so some diversification is useful.
Two Steps to a Solid and Profitable Portfolio was last modified: February 3rd, 2014 by Mitchell Clark, B.Comm.
Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »
Forecasts Aug. 27, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 27, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)