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3 Shares On My Christmas List: J Sainsbury plc, Barratt Developments plc & Direct Line Insurance Group plc

When an investor starts to build an investment portfolio, a key consideration should be sector weighting, or more generally diversification. Just imagine if a large part of your portfolio had been invested in the oil and gas or industrial metals and mining sector over the last 12 months, the latter being down by nearly 50%.

So, given my appreciation of dividend income, I feel it’s appropriate to share a diverse range of shares that could fit well into a diversified income generating portfolio.

Sainsbury’s tastes the difference

Commentators had written J Sainsbury (LSE: SBRY) off along with sector peers Tesco, Asda and Morrison’s as they struggled with the growth at Lidl and Aldi. Along with the rest of the sector, the shares sold off to below 230p as the market seemed to forecast a long hard slog to regain the initiative.

However, the retailer delivered a surprise with its Q2 trading statement on 30 September, guiding the market moderately higher for the full year.

This new-found confidence seems to be well placed with figures from Kantar WorldPanel yesterday showing the supermarket to be the standout performer of the big four, despite difficult market conditions. According to the data Sainsbury’s increased sales by 1.2%, growing across its convenience, supermarket and online businesses and increasing market share to 16.7%. This compares favourably to falls in sales at Asda, Tesco and Morrisons, though it’s not enough to keep up with double-digit growth at Aldi and Lidl.

The shares, with a twice-covered 4%-plus yield, are by far my favourite pick from the big four.

Barratt – building confidence

Like most housebuilders Barratt Developments (LSE: BDEV) shares fell off their new-found October highs of late as the market pondered the potential for a rise in interest rates coupled with the daily prediction of a housing bubble set to burst at some point.

While I would be the first to admit that house building is cyclical, I prefer to listen to what the company has to say about the state of the market, and the general environment.

On this front, and particular to Barratt, management said the company was trading positively across all key metrics, recruiting more people, improving gross margin and continuing to improve ROCE (Return on Capital Employed), a key quality measure.

Importantly, Barratt has pledged to return £987m to shareholders by the end of November 2017. The total return for the year ending June 2016 should be around 30p per share, which puts the shares on a chunky 5% yield, increasing to 6% for the year ending June 2017.

Weathering the storms

Despite the 50% plus rise in the share price this year, Direct Line (LSE: DLG) shares still don’t look expensive. Also impressive is the forecast 5%-plus yield still on offer.

When Direct Line updated the market last month, it pointed to further reductions in operating costs of 7% for continuing operations. It also reiterated its expectation of a 2015 combined operating ratio in the range of 92% to 94% (anything below 100 is profitable) for ongoing operations after normalising for claims from major weather events. Underlying trends remained in line with prior expectations of a combined operating ratio of 94% to 96%, so not as good as they’d expected but still profitable.

Importantly, management intimated that they would consider a further special dividend at the time of the 2015 preliminary results in March dependent on their view of long term capital requirements. Even without this payment, the group intends to grow the regular dividend annually in real terms.

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Dave Sullivan has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.