Portfolio Diversification Is The Simplest Way To Lower Ri…
My first step toward diversification was to take an honest look at what I want to achieve and what I’m capable of. My goal is a mixture of income and capital appreciation. I am fairly confident in my ability to select dividend stocks, though every investor makes mistakes from time to time, and I know I can only juggle so many stocks at once. In other words, 50 stocks are too many for me, so a core part of my diversification strategy is to outsource some of my work.
For example, I own two Baron mutual funds to gain exposure to growth stocks and smaller companies. I own several closed-end funds: one focused on healthcare stocks with an option income overlay, one investing in convertible securities, and one with a broadly diversified dividend portfolio. And I own three exchange-traded funds: one with an option income focus and two that use very different screening approaches to pick dividend stocks.
This collection of investments includes hundreds of stocks across a wide range of sectors (and convertible bonds), materially adding to my diversification. And many of these pooled investments do things I either don’t want to do myself because they are time-consuming (such as an option income strategy) or don’t think I can reasonably do myself (such as investing in healthcare and small growth stocks). With my foundation spread widely across sectors, investment approaches, and a large number of stocks and convertible bonds, I can comfortably invest in individual stocks knowing I have a diversified foundation to work from.
Expand
NYSE: O
Realty Income
Premium Feature
Moneyball Superscore
85/100
Today’s Change
(-0.12%) $-0.07
Current Price
$59.50
Key Data Points
Market Cap
$56BMarket cap calculated using publicly traded s outstanding only. Does not include unlisted, private, or dual-class non-traded s. Implied market cap may vary.
Day’s Range
$59.18 – $59.85
52wk Range
$55.86 – $67.94
Volume
6.4M
Avg Vol
5.6M
Gross Margin
50.82%
Dividend Yield
5.45%
Step two is focusing on what I can do: Dividend stocks
My preference is to buy companies that have impressive histories of increasing their dividends and yields that are historically high. I dig deeply into the companies I am considering and only buy when I believe the business is worth owning. Some of the stocks that have made the cut include Realty Income (O -0.12%), PepsiCo (PEP -0.24%), Black Hills (BKH -1.36%), and Enbridge (ENB -0.95%).
Stepping back, that’s a real estate investment trust, a consumer staples giant, a regulated utility, and a North American pipeline giant. Because of my pooled investments, I don’t worry too much about overlaps, but I also make sure to buy stocks across various industries. For example, I own several REITs, several consumer staples companies, and a couple of energy stocks and utilities. These are areas where income opportunities often arise, so I have to go where the dividends are, while still working to keep the portfolio spread across various sectors.
Notably, when I buy a stock, I invest a specific dollar amount. Basically, I have a position size that I want to build. Once I build to a full position, I don’t add to it. That may limit my upside, but it also means my downside risk is limited.
Expand
NASDAQ: PEP
PepsiCo
Premium Feature
Moneyball Superscore
69/100
Today’s Change
(-0.24%) $-0.33
Current Price
$136.32
Key Data Points
Market Cap
$186BMarket cap calculated using publicly traded s outstanding only. Does not include unlisted, private, or dual-class non-traded s. Implied market cap may vary.
Day’s Range
$136.04 – $137.49
52wk Range
$133.73 – $171.48
Volume
8.8M
Avg Vol
8.3M
Gross Margin
53.98%
Dividend Yield
4.26%
What’s also notable here is that I try to buy when a stock has a historically high yield. For example, despite a long and successful history, PepsiCo isn’t currently performing very well as a business. I believe the Dividend King, with over 50 annual dividend increases, will get back on track. But Wall Street is downbeat on the stock, pushing the yield above 4%. It was an opportunistic purchase I was prepared to jump on because if I can’t find something I want to buy, I’m happy to hold cash. Warren Buffett uses a similar approach, so I’m not going out on a limb here. And cash is the ultimate “safe” investment, though inflation erodes its value over time. Still, I usually have cash on hand because I prefer to be highly selective about which companies receive my capital.
The big takeaway is to know your limitations
Diversification is important, and it is fairly easy to do if you take the time to consider how many baskets you are capable of dealing with at one time. I know I can’t do everything all at once, so I’ve outsourced aspects of my portfolio while continuing to do the things that I enjoy and believe I’m good at. This allows me to focus my energy where it is ly to produce the best results. And if I can’t “find” an investment, I don’t force myself to find one just to say I’m doing something. I only make a move when I have a strong conviction, knowing that cash is a safe-haven investment that provides me with material flexibility in both good markets and bad ones.
Read Next
•By Jeremy Bowman
Best Consumer Staples Stocks to Buy in 2026 and How to Invest in Them
•By James Brumley
•By Anders Bylund
My Top Dividend Growth Stock to Buy in September and Hold Forever
Coca-Cola vs PepsiCo: What’s the Better Dividend Stock to Buy Right Now?
3 Dividend Stocks Trading Near Their 52-Week Lows
What’s Wrong With PepsiCo Stock?
About the Author
Reuben Gregg Brewer is a contributing Motley Fool stock market analyst covering energy, utilities, REITs, and consumer staples. He is the former director of research at Value Line Publishing, where he rose from mutual fund analyst to equity analyst before leading all research operations. Reuben holds a bachelor’s degree in psychology from SUNY Purchase, a master’s in social work from Columbia University, and an MBA from Regis University. He has been featured as a financial expert on CNBC and in the Financial Times, Barron’s, and InvestmentNews.
Stocks Mentioned
PepsiCo
NASDAQ: PEP
$136.32
(-0.24%)-$0.33
Motley Fool Stock Advisor’s Latest Pick
—% Avg Return
Realty Income
NYSE: O
$59.50
(-0.12%)-$0.07
Enbridge
NYSE: ENB
$47.76
(-0.95%)-$0.46
Black Hills
NYSE: BKH
$71.30
(-1.36%)-$0.98
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
Sumber Artikel:
Fool.com