Can you beat the market with AstraZeneca plc, BAE Systems plc and ARM Holdings plc?

Trying to build an equity portfolio from scratch is a daunting process. Where do you start? Well, there are three main ‘buckets’ of equities you can use to construct an all-weather portfolio that will generate steady returns over time. These three buckets are income, growth, and growth & income.

If you start at the beginning and buy one stock that falls into each one of these buckets, it’s difficult to go wrong, and you’ll have a solid portfolio backbone from which you can build out other equity positions. Here are three stocks that could be the perfect candidates.

Top income pick

When it comes to income, AstraZeneca (LSE: AZN) is a top pick. The drugs giant operates in a defensive industry and has always prioritised cash returns to investors. Indeed, dividends are so important to the company that Astra’s management compensation is linked to the company’s dividend payout. In other words, if shareholders don’t receive a set proportion of Astra’s income, then the company’s management has to take a pay cut.

For the past five years Astra’s shares have supported an average dividend yield of 4.9% and at present prices, the yield stands at 4.8%. The dividend payout is covered 1.5 times by earnings per share and Astra’s shares trade at a relatively attractive forward P/E of 14.6.

Rapid growth

BAE Systems (LSE: BA) provides the perfect blend of both growth and income. City analysts have pencilled-in a pre-tax profit of £1.5bn for 2016, and if BAE hits this target, the company will have seen its pre-tax profit grow by 270% over just four years. On a per share basis, analysts are expecting BAE to report earnings of 38.5p for the year ending 31 December 2016.

On this basis, the defence group’s shares trade at a forward P/E of 12.3. Analysts are currently expecting earnings per share growth of 7% for the year ending 31 December 2017.

What’s more, over the years BAE has built a reputation as an income champion. During the past five years the company’s shares have supported an average dividend yield of 5.1% and at current prices shares in BAE yield 4.3%. The payout is covered 1.9 times by earnings per share.

Unique growth

Astra and BAE both offer growth and income, but when it comes to a pure growth play, you can’t go wrong with Arm (LSE: ARM).

Despite concerns about the state of the semiconductor industry and flagging smartphone sales, at the end of April Arm reported a robust set of first-quarter numbers allaying worries about the company’s ability to grow in a maturing market. Revenues of $398m were up 14% year-on-year and 22% ahead in sterling terms, while pre-tax profits expanded 14% to $137.5m and earnings per share rose 15% to 8.2p, despite the fact that operating costs increased by a third. 

City analysts expect Arm’s earnings per share to grow by 43% to 34.6p overall this year, which puts the group on a forward P/E of 28.2 — its lowest valuation in five years. Arm’s shares only offer a token dividend yield of 1%.

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