Are you already invested in the stock market but worried about diversification? It’s not always easy to know whether your portfolio is too concentrated, or how well it will perform in stormy stock market conditions.
Today, I want to suggest two stocks that I think should deliver valuable diversification, while providing a reliable, growing income.
The reality is that most of us can’t afford to sustain big losses when we’re caught out by unexpected events, or make a mistake. At times like this, a diversified portfolio will help to limit our losses and protect the majority of our wealth.
The maths are simple. If you own four stocks with equal position sizes and experience a 40% loss on one stock, the value of your portfolio will fall by 10%.
If you own 15 stocks in equal sizes, a 40% loss will only result in a 2.7% hit to your portfolio.
Pick #1 – growth
My first stock choice is medical technology group Smith & Nephew (LSE: SN). This company’s main business is making joint replacements for knees, hips and shoulders. It also creates products to help with wound management and other injuries.
Smith & Nephew sells its products in more than 100 countries. Although the US accounts for nearly half of all sales, emerging market sales rose by 7% last year and now account for 17% of revenue.
As emerging markets develop, the number of people able to pay for modern healthcare increases. A good example of this is China, where the group reported “double-digit” percentage sales growth in 2018.
This business has several other attractions too, in my view. It’s highly profitable, with an operating profit of nearly 18%. Debt is fairly low and cash generation is good, comfortably supporting the dividend.
The company gained a new chief executive last year who’s working hard to accelerate the group’s growth. Acquisitions are a possibility, as is a takeover bid.
The shares aren’t cheap, and the dividend yield of 2.1% is fairly modest. But I believe this business has a long runway of growth ahead. I’d rate the shares as a long-term buy.
Pick #2 – income
I like to mix dividend growth with high yield stocks in my portfolio. Combined, my hope is that these will provide an attractive, rising income.
One high-yield pick on my radar at the moment is FTSE 100 real estate investment trust (REIT), Landsec (LSE: LAND). Shares in this firm have fallen by 15% over the last two years and are down 33% from their 2015 highs.
Investors are rightly concerned that rental rates will fall as struggling retailers force landlords to choose between lower rents or store closures.
However, Landsec’s retail property is fairly high quality and is diversified by a valuable portfolio of prime London property. Debt is low and the group’s shares trade at a 35% discount to their book value of 1,384p per share.
A lot of bad news is already priced into this stock. With a forecast dividend yield of 5.3%, I think Landsec makes sense as a long-term income holding.