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5 stocks for a diversified portfolio

The S&P/ASX 200 (ASX: XJO) (^AXJO) is slowly climbing higher and higher each week as investors respond to low interest rates and high yields offered by stocks. For new investors, transitioning funds from term deposits or bank accounts into the stock market for the first time can be daunting.

Finding stocks that have a low level of risk is paramount but well-known brand names and good companies can be overpriced, which can present a number of unseen risks.

Diversifying a portfolio is a tried and tested way of mitigating losses but enables investors to have exposure to a number of stocks in different sectors. Here are five stocks that range in size, sector, return dividends of 5% or more and are well-priced for long term growth.

Banking stocks form large portions of many investors’ portfolios due to their perceived ‘safety’ and fully franked dividends. For most of the big four banks, the home loan market has become a battlefield for profits and revenue, but ANZ (ASX: ANZ) is an exception to this. Its push into Asia seeks to take advantage of a surge in finance and business conducted in the region and is on track to drawing 25%-30% of revenue from its APEA division by 2017. Paying a 5% fully franked yield and currently trading on earnings of 12.53, this Fool believes ANZ represents the best long-term value of the big four banks.

‘Core’ stocks are called so because they make up the ‘core’ of your portfolio. Brand recognition, steady growth, profitability and regular dividends are reasons why investors are adding Telstra (ASX: TLS) to portfolios. This week the company realised a huge net profit of $3.9 billion, up 12% from last year. Some investors have been shying away from the stock because its transition from its fully owned copper network to the NBN will remove its competitive advantage. However with a special dividend looming and huge amounts of surplus cash, Telstra can fit into almost any portfolio.

Another stock with high yields that investors have side-stepped is Metcash (ASX: MTS). It’s true, the supermarket welterweight fights against heavyweights like Coles and Woolworths. However the company has managed to grow profits and revenues and pay dividends of around 10% when franking credits are taken into account. On current prices it pays an 8% dividend plus franking credit and trades on a P/E of 13.3.

In the mining services sector, stocks are getting beaten down as the market expectations run thin for profits and revenues. Leighton Holdings (ASX: LEI) has been tarred with the same brush of all mining services stocks but has many other domestic and international operations outside of mining services that remain profitable. In the past fortnight, the company has been awarded over $3 billion of contracts. At current prices it operates on earnings ratio of 10 and pays a dividend of 5.7%.

The last stock is the smallest but is not necessarily the riskiest. With interest rates dropping so low, investors have been slowly but surely driving up prices of stocks set to gain from cheaper finance and better foreign exchange. Mortgage Choice (ASX: MOC) is a small-cap stock that provides financing solutions for would-be homeowners and investors. Its market share of new home loans has been growing and revenues are up over 50% since 2004. The stock has increased 75% in the past year but operates on a modest P/E of 16; paying a 5.3% fully franked dividend this one deserves a spot on watchlists.

Foolish takeaway

Building up a balanced portfolio over time is important. Buying good companies at even better prices is even more so. No stock is a buy at any price and investors should consider what they are willing to pay before they commit to a purchase. However at current prices and with the long term in focus, these five stocks could reward investors willing to take the risk.

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Motley Fool contributor Owen Raszkiewicz owns shares in ANZ, Metcash, Leighton Holdings and Mortgage Choice. 

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