4 types of stocks everyone should have

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So you’re thinking about starting a portfolio, evaluating how your holdings have performed, or considering some portfolio spring cleaning?

Here are four types of stocks that every savvy investor should own for a balanced hand.

1. Growth Stocks

These are shares that you buy for capital growth rather than dividends. Growth stocks are essentially stocks of companies that generate positive cash flow and whose earnings are expected to grow at a rate above average relative to the market.

It’s worth remembering that some of the most successful firms in the US economy pay relatively pitiful dividends, such as Warren Buffett’s Berkshire Hathaway. If anything, they are the equivalent of a real estate investment. You buy and hold while riding the appreciable value of the property. You might not make much money on stocks for the first few years, but if you stick to them for a long time, and a good quality manager avoids obstacles along the way, other investors will be taken care of. . Hope will go on board at higher prices.

An example is the old Commonwealth Serum Laboratories at CSL, Australia. In terms of dividend, the stock is giving only 1.62 per cent annualized returns but long term holders are not complaining. The former government laboratories were privatized in 1994 at $2.30 a share, and the shares have risen more than 45 times since then. They broke above $100 in December and are now near $107 each.

It’s tempting, but it’s not easy: Buying shares in growth companies early is the holy grail of investing and they’re even harder to find when the stock market is booming.

In a bull market, you can identify successful companies with strong growth prospects and calculate what you are willing to pay for their shares. Then wait for the inevitable market volatility that brings the share price to your limit.

2. Dividend aka Yield Stock

Yield stocks, ideally, are those that perform well in bull markets while providing partial downside protection for investors in bear markets. They are the stock of choice for the income-seeking investor.

The stock yield is calculated by dividing the annual dividend paid by the company by the company’s share price. For example, if a company is expected to pay $0.50 in dividends next year and is currently trading at $20, the dividend yield is 2.5%.

It is because of their dividend yield that the big four banks and Telstra hold more than half of retail investors in Australia. They’ve been sold since late last year on a fair basis that the economic outlook isn’t rosy, but they aren’t going out of business any time soon.

ANZ’s weak half-year profit results last week saw a six-month dividend cut from 95c to 80c, but the share price correction on budget day, the day after the results, yielded shares just under $25. are 6.4 percent. If you’re retired and not paying taxes, the dividend attribution system means that if you buy at these levels, you’re getting more than 8 percent in your hands per year.

While certainly the higher the yield, the better, knowledgeable investors also know that cash flow and business stability are also important considerations when buying shares for income.

So, when shopping for income – look for yield and look for stability in the core business.

3. New Issues

Also known as an initial public offering or IPO, this is why the stock market was created in the first place. These events mark the first time that companies make their shares available to the public. Of course, one can buy and sell after the shares are listed on the market but it is often tempting to get an allotment in an IPO before the shares are listed.

In the past, it was difficult for the general public to gain access to those new floats unless promoters had trouble filling them. This is changing now, thanks to technology, and the returns have been really great in recent times. In 2015, IPOs gave an average return of 24 per cent.

We reported last week that companies that have used our technology to buy 25 predominantly smaller companies that have been launched since our inception in October 2013 could find themselves ahead of significant amounts. especially if they remained on the shares for a year.

We calculated that if they had bought the full spread of 25 floats, investors would be up

  • 5.1% if they sell out on the first day
  • 9.3% if they sell at the end of the first month
  • 30.6% if they were sold at the end of the first 3 months, and
  • 86.3% if they were sold at the end of the first year.

It is still an ’emerging’ asset class for most investors because of the problems common investors faced in the past in accessing these types of opportunities.

4. Defensive Stock

These are stocks that don’t go down so much in tough times because they sell consumer staples. Typically, these types of stocks offer a consistent dividend and report steady earnings regardless of the state of the stock market as a whole.

Also known as non-cyclical stocks, these companies operate businesses that are not highly correlated to economic cycles such as utilities, food and (traditionally) oil. For example, even in a recession, you don’t miss going to the supermarket.

Don’t expect dramatic growth or big dividends from this portfolio segment, but it’s always worth a few defensive stocks.

Wesfarmers, which Coles owns, is a prime candidate and it’s worth noting that the shares have traded between $36 and $45 each over the past 12 months, making them a good fit for the brave investor willing to take some risk. options have been made. They’re creating an interesting prospect as they go. up and down. The yield between growth and dividend stocks is around 4.7 per cent. But again, a retiree can beat it, thanks to a system of applying dividends that in some cases will actually send the holder a refund for some of the tax paid by the company.

However, be careful not to overload on defensive stocks, even if you are a risk averse: These companies generally provide basic needs and so may outperform during a bust, but will underperform during a boom.

Overall, a balanced portfolio is just that – balanced. A healthy mix of value-enhancing stocks, income-generating holdings, new listings (IPOs), and non-cyclical stocks is likely to grow your nest egg when times are good and keep it well-padded when times get tough. Is.

5. Choosing a Strategy or a Stock?

Finally, an overview on stock-picking. It’s fun. Like enthusiasm for victory, deflation on defeat. But, at the end of the day, you’re ultimately betting that either the market has mispriced the stock (and the market will agree with your opinion about hidden value), or that regional rotation will occur and your stock will be trading. Will continue The right side of that rebalancing will remain.

So, are ETFs the answer? They certainly provide diversification. But, remember that almost all of the largest, most recognizable ETFs are weighted by market capitalization. So, you are effectively quantifying your allocation on the size of the company as a whole. And, I have yet to find evidence of a positive and lasting relationship between company size and performance. So, does it really make sense that size determines what you ultimately invest in? As they say, a rising tide lifts all boats, and that’s the beauty of ETFs for some. Turns out, and choosing an ETF was a smart recommendation. Goes down, and ‘blames the market’. Even so, this doesn’t necessarily bode well for investors who focus only on risk-weighted outperformance on their investments.