Diversification is extremely important for any investor, because unforeseeable events can and will impact individual companies. By owning a range of companies, you can reduce the risk of one event eroding a large portion of your wealth. However, in order for diversification to be successful, you need to buy shares in companies from a range of different industries. Here are five blue-chip stocks that could form a diverse portfolio.
Blood plasma and protein science company CSL Limited (ASX: CSL) is one of the most innovative and successful companies Australia has ever produced. The ageing population in Western countries means that demand for CSL’s products are going nowhere but up. Better yet, CSL’s products are so essential that governments would have to be even crazier than they actually are, to hamper the company’s business.
The share price is down 5.5% in the last month, putting it in a reasonable range. At current prices, CSL trades on a trailing dividend yield of about 1.6% and the company continues to buy back shares. It’s an appropriate investment for ethical investors because it helps sick people, and donates to organisations such as the World Federation of Hemophilia.
Oil and gas producer Santos Limited (ASX: STO) has seen its share price drop over 7.5% in the last six months, and investors may wish to consider purchasing shares before the company gets a profit boost from upcoming exports of LNG. At current prices, the company trades on a trailing yield of 2.4%, fully franked. That’s not bad at all, but income investors may wish to consider the more generous yield of competitor Woodside Petroleum Limited (ASX: WPL).
Telstra Corporation Ltd (ASX: TLS) has had a fairly flat share price of late, but its generous dividend yield of 5.5%, fully franked remains attractive. The best thing about Telstra is that although its copper lines are on the way out, the company is dominant in the growing mobile market. If you’re looking for a blue chip company to hold in retirement, it’s hard to go past Telstra.
Coca-Cola Amatil Ltd (ASX: CCL) is down a whopping 25% in the last six months, and its trailing dividend yield of 5.4% is somewhat irrelevant, because the dividend is likely to fall. The company is struggling in Indonesia, and I’m one of those that overestimated the profitability of that market. However, the move back into beer could signal a return to growth, and exposure to the fizzy drink company provides investors with welcome diversification. If you ask me, Coca-Cola Amatil is down but not out.
Finally, it’s hard to go past Insurance Australia Group Limited (ASX: IAG) for exposure to the insurance industry (and therefore rising interest rates). IAG has recently confirmed it forecasts gross written premium growth of at least 3% and it expects to report a margin of at least 14.5%. Put simply, this means the company predicts another very profitable year. Boasting a trailing dividend yield of 6.3%, the long-term prospects for IAG look good, because when interest rates eventually return to more normal levels, the company will earn more interest on its float.
As regular readers know well, as a younger investor, I prefer to own smaller growing companies. However, for retirees and more conservative investors, blue-chip stocks are generally more attractive. I believe these companies are amongst the best-priced blue-chips on the market today. Together, they are a reasonably well-priced and diverse collection. I recommend supplementing these picks with stocks that will profit from the ageing population and easily resist recessions. Those approaching retirement should also make sure most of their stocks pay a decent dividend.
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Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article.