It's been a roller-coaster year for the stock market so far, and plenty of investors are questioning their strategy. Unfortunately, there's nothing you can really do to avoid volatility and market corrections. You just have to set yourself up with a strong portfolio that can provide reliable returns over the long term. If you want to set yourself up for growth over the next market cycle, consider starting with this set of blue chip stocks.
Building an allocation
There's no such thing as a perfect stock. Different stocks bring different features to the table, and they can play various roles in a good portfolio. The first step in developing a great allocation is to figure out which roles need to be filled. Then you can move onto figuring out which stocks do the best job of filling them.
It's best not to go overboard with diversification, but you still need to cover a few different bases. A good bundle has some balance between value stocks and growth stocks. Each has their day, depending on market conditions, and it's important not to go all-in on any one group. Dividend stocks can also help generate returns even through bear markets and corrections. Investing in some international businesses also contributes to a more balanced approach.
A classic stock bundle should cover most of your bases above without complicating matters.
The old guard
When we think about classic stocks, we usually think of iconic brands that are synonymous with their industry. Most of them are large, diversified companies that churn out reliable cash flows. By and large, these are value stocks and Dividend Aristocrats.
Coca-Cola (NYSE: KO) dominates the global soft drink industry along with rival PepsiCo. The company isn't growing too quickly these days, but it is able to generate nearly $10 billion in free cash flow from its $35 billion in annual sales. It's increased its dividend 59 consecutive years and currently pays a 2.75% yield to keep investors happy.
Realty Income (NYSE: O) is one of the largest real estate investment trusts (REITs). It owns 11,000 commercial properties that are leased by more than 600 clients. Its largest customers include popular convenience stores, pharmacies, discount retailers, grocers, and gyms. The shift away from brick-and-mortar commerce is a concern, but the REIT has managed to grow throughout the COVID-19 crisis. It pays a monthly dividend that currently yields 4.1%.
Johnson & Johnson (NYSE: JNJ) is a diversified healthcare giant. It's a pharmaceutical company, medical device maker, and producer of consumer wellness goods all in one. It's recession resistant, and something catastrophic would have to occur to take down all its businesses at the same time. The stock pays a 2.6% dividend yield, and all indications are that the distributions will continue to grow.
Home Depot (NYSE: HD) sits at the intersection of retail and homebuilding. Its scale and brand are best-in-class, and it generates revenue from consumers as well as contractors. There have been roughly five million more households started than homes built in the U.S. over the past decade, so Home Depot has clear catalysts for years to come.
The (relative) newcomers
None of the stocks above are growth stocks, and growth is one of the primary goals for most equity investors. To achieve that, it's wise to include some of today's tech leaders. These relative newcomers are all powerhouses in their industries, and they have wide economic moats. They reinvest their cash into expansion rather than focusing on dividends.
Apple (NASDAQ: AAPL) is the largest publicly traded company in the world with the strongest consumer electronics brand. It grew 33% last year and produced around $90 billion in free cash flow. Its valuation ratios are a high relative to historical levels, but they aren't crazy, and Apple isn't going away any time soon.
Amazon (NASDAQ: AMZN) is a global leader in both e-commerce and cloud computing. The pandemic actually accelerated both of those businesses, and it still reported 15% growth in the most recent quarter. The stock is expensive, but it has remarkable staying power and growth prospects.
Microsoft (NASDAQ: MSFT) remains a heavy hitter in personal computing, gaming, cloud computing, and professional software. The stock is more expensive than it's been in the past, but it's also in one of its highest growth phases since the 1990s. Microsoft is tech royalty.
Salesforce.com (NYSE: CRM) is unrivaled in customer relationship management software for sales organizations. It's also optimized for the next phase of enterprise tech with a cloud focus and artificial intelligence capabilities. It's more volatile than some of these other tech leaders, but its economic moat is formidable and growth opportunities are plentiful.
Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) is a major presence in digital advertising, web search, cloud computing, mobile operating systems, and streaming video. Alphabet also invests in transformative technologies, such as quantum computing, so it has a chance to keep its growth prospects intact for the long haul.
Nvidia (NASDAQ: NVDA) initially rose to fame with best-in-class graphics processing unit (GPU) products for gaming. While it still retains that title, its portfolio has expanded into other high-growth target markets such as data centers, autonomous vehicles, machine learning, virtual reality, and cryptocurrencies. It's an expensive stock that's been on a phenomenal run, but Nvidia still has long-term upside.
How to put these 10 stocks to work in your portfolio
The last piece of the puzzle is weighting your portfolio. The ideal allocation depends on your goals, risk tolerance, and personal conviction. Investors with longer time horizons should probably lean more heavily on the high-growth tech stocks. Stable dividend stocks might be better suited for people closer to retirement.
Most investors will need to utilize fractional shares to buy this bundle. Luckily, fractional shares are commonplace with online brokers.
This classic set of stocks isn't perfect for every investor, but it's a good foundation. You can build a more tailored portfolio as better opportunities present themselves.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Ryan Downie owns Alphabet (A shares), Amazon, Johnson & Johnson, Microsoft, Nvidia, and Salesforce.com. The Motley Fool owns and recommends Alphabet (A shares), Amazon, Apple, Home Depot, Microsoft, Nvidia, and Salesforce.com. The Motley Fool recommends Alphabet (C shares) and Johnson & Johnson and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.