When buying stocks for my investment portfolio, I like to choose from among a variety of stocks to ensure that it is well rounded. This gives it protection during challenging times for the stock markets and allows for rapid gains during good times. It even earns me a passive income.
These stocks can be divided into the following five categories.
#1. Growth stocks: ensuring capital gains
As the name suggests, these are fast-growing stocks based on their rapidly improving fundamentals. Typically they grow faster than their industry average. A good example is the FTSE 100 athleisure retailer JD Sports Fashion. Another one is the FTSE 250 aviation company Wizz Air, which is bouncing back fast. They do not always pay great dividends, though. And stocks like Wizz Air are not even back in good financial health since the pandemic, not yet.
#2. Dividend stocks: making a passive income
FTSE 100 dividend yields are rising, which makes it a great time to buy dividend stocks that will earn me a steady passive income. Miners like BHP and Evraz have among the highest dividend yields. But I think other commodity stocks like BP and Royal Dutch Shell can also see rising dividends over time. On the downside, though, these are not the fastest rising stocks around. And dividends are never guaranteed, of course.
#3. Defensives: protecting against bad times
It is no coincidence that stocks like the pharmaceuticals biggie AstraZeneca and hygienist Rentokil Initial showed a sharp run-up after the market crash of March 2020. These are among the safest FTSE 100 stocks that were a good bet for investors as they turned bearish. In other words, they provided a good ‘defense’ against bad times. Even otherwise, they are financially healthy companies, even though they may not be the best growth stocks around.
#4. Cyclicals: rising with the economy
These stocks are sensitive to how the economy is doing. They perform well during good times and vice versa. Examples include banks and cinemas. For instance, I hold Cineworld in my portfolio. Despite its huge debts, I reckon its share price can rise as the economy picks up and people want to watch movies. This is something they are less likely to do in slowdowns, when incomes are stretched.
#5. Speculative stocks: gaining exposure to new industries
From cryptocurrencies to cannabis, there is an allure to stocks in relatively nascent industries. They are volatile at present, but over time it is possible that they may gain greater legitimacy. I would not risk my life savings on such stocks, but investing money I am willing to lose is not a bad idea.
Other stock segmentations
These are typically the segments I keep in mind, though they can overlap. For instance, growth stocks may also pay dividends. Similarly, dividend stocks can either be a defensive or a cyclical. There are other ways to think about them too. A portfolio can be divided as either large or small caps. Or I can buy them based on the sector in which they operate.
Whichever way I look at it, this kind of segmenting can help me make choices for my competing requirements.
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Manika Premsingh owns shares of AstraZeneca, BP, Cineworld Group, Evraz, JD Sports Fashion, Rentokil Initial, and Royal Dutch Shell B. The Motley Fool UK has recommended Wizz Air Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.