3 stocks to diversify your portfolio

Companies of different sizes and purposes can offer stability to your portfolio.

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Investors can turn to government bonds or term deposits if they want risk-free returns, but many investors prefer shares as an instrument to boost their wealth. Historically, the stock market has delivered better returns to investors, which is fitting considering there is a higher level of risk involved; however, can these gains be assured?

In short, the answer is no – there will always be a level of risk involved when buying shares in any company. To reduce this risk, it is vital that investors diversify their money into different companies, so that any weaknesses in one company can be offset by the strengths of another.

One way for investors to diversify is across industries or company size. Here are three companies that could boost your portfolio in the long term.

1300 Smiles (ASX: ONT) is a small-cap stock that buys and runs dental practices and employs dentists as paid staff as opposed to the dentist acting as an owner-operator. Given the demands of being a dentist, running the business is an extra task that many would prefer to not have to worry about. 1300 Smiles takes advantage of this by looking after the staff whilst also making a profit for itself as the owner of the practices.

The company has delivered outstanding and consistent returns over the last five years, which has seen its shares appreciate by a whopping 186%. Currently, it boasts a market capitalisation of $147 million and is only operating in Adelaide and in areas of Queensland, meaning that there could still be significant growth ahead. That's certainly something to smile about.

Cochlear (ASX: COH) is a manufacturer and distributor of cochlear implantable devices. Whilst shareholders have been on somewhat of a rollercoaster ride in recent times (due to lower-than-anticipated earnings, as well as increased overseas competition), the company develops top-quality products and should prove strong in the long run. When it comes to health, you can't go past quality.

Currently priced at $60.00 per share, Cochlear is trading at a P/E ratio of 25 and offers a partially franked 4.2% dividend. Are your ears ringing yet?

Coca-Cola Amatil (ASX: CCL) needs no introduction, given that the brands it represents are amongst the most popular in the world. Competition from key rival Schweppes and cost pressures from Australia's major grocers led to a poor half-year earnings report and a poor outlook for the remainder of the year, which has seen the company's share price plummet to $12.20 – a 21% depreciation since March.

Given its heavy fall, now could be an excellent time to pick up stocks in this company to add a strong foundation to keep the bubble in your portfolio.

Some argue that to receive the greatest benefits of a diversified portfolio, as many as 20 companies should be owned. If you were looking for other great companies to invest your hard earned dollars, then look no further than our #1 dividend-paying stock. Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

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Motley Fool contributor Ryan Newman owns shares in Cochlear.

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