The Australian share market has continued its record run and it seems like nothing can stop it. However, investors must be aware that market corrections are bound to occur and as we've all been taught from a young age, "don't put all of your eggs in one basket".
This refers to the important investing principle of diversification, a very smart way of limiting downside risk while still gaining in a market upturn. So here are three stocks that I think make up a nice and simple diversified portfolio.
1. Insurance Australia Group Ltd (ASX: IAG) – Financials
The insuring giant operates brands we've all seen on TV, like SGIO and NRMA. Recently, IAG has been trying to bump up its market share and its most recent purchase of Wesfarmers' underlying insurance wing did just that. Following the purchase, IAG is now the market leader in insurance and the purchase is expected to provide cost benefits from a larger scale of operation and a wider revenue exposure.
IAG's current price of $6.16 means that it trades on around 12 times FY15's expected earnings, quite low considering its recent price rise. But for me, IAG's massive 6.3% fully franked dividend yield is the icing on the cake.
2. ResMed Inc. (CHESS) (ASX: RMD) – Healthcare
ResMed provides a wide range of medical equipment to treat sleep apnea, a condition affecting a large chunk of the U.S. population. Its persistent efforts to reinvest 8%-9% of revenues into research and development generates innovative products like its new Air Solutions platform, a move that is likely to ramp up its earnings in FY15 and beyond.
The healthcare sector is also set to benefit from higher demand given our ageing population and increasing health awareness and ResMed's products are likely to cater to these increasingly complex needs. Although it doesn't trade on very attractive multiples and offers a relatively low dividend yield, I think ResMed's growth prospects certainly outweigh its high price tag.
3. Slater & Gordon Limited (ASX: SGH) – Consumer Discretionary
The well known legal services firm has once again produced outstanding results in its FY14 report, smashing expectations. Its existing operations remain strong, but its expansion into the UK is what excites me. In addition to stellar earnings growth, Slater & Gordon also revealed plans to acquire Victorian personal injury firm Nowicki Carbone and Queensland consumer law group Schultz Toomey O'Brien. The recent acquisitions are expected to result in about $39 million in annual revenue and increase its growing market share.
Despite gaining about 71% in the past year, Slater & Gordon trades on a modest price-to-earnings ratio of 19 with analysts' forecasts for double-digit growth in the next few years. I think it's a great long-term buy for investors looking to gain some exposure to the legal industry.
