3 Dividend Stocks to Diversify Your Portfolio

One of the best strategies for beating the market is having a diversified portfolio. Think about it: If you invest in only one area, say technology, and the technology sector takes a hit, your portfolio is going to suffer as well. However, if you have a diversified portfolio, one sector can take a hit while the others continue to grow, thus growing your pocketbook. Let's consider three dividend-paying companies that would make a great addition to your watchlist, and help you diversify your portfolio.

Bring on the soda!
Since its namesake soft drink was created in 1893, PepsiCo (Nasdaq: PEP  ) has been a popular brand of soda. Yes, it comes in second behind Coke, with a market share of 29.3%, but with four of the top 10 ranked soda brands in the world, this is a company that's going to be around for the long haul. Unlike its competitors Coca-Cola (Nasdaq: KO  ) and Dr. Pepper Snapple (NYSE: DPS  ) , Pepsi has a wide base of non-drink products that allowed it to bring in more than $60 billion in revenue in the past 12 months -- $22 billion more in 2010 than Coke.

More importantly, Pepsi has seen significant dividend growth, something every investor can appreciate:  

Fiscal Year Ending

Sales (in millions)

Sales Growth

Dividends Per Share

2010

$57,838

33.8%

$1.89

2009

$43,232

0%

$1.78

2008

$43,251

9.6%

$1.65

Source: Motley Fool CAPS.

Click here to add Pepsi to your watchlist.

Give your portfolio some defense
In the defense industry, Northrop Grumman (NYSE: NOC  ) may not be the biggest, but in this writer's opinion, it's certainly one of the best. Here's why:

In 2010, Northrop Grumman increased its sales from $33.8 billion to $34.8 billion, increased its earnings per share from continued operations by 39% to $6.77, increased its free cash flow to $1.7 billion, and most importantly for dividend investors, Northrop Grumman raised its quarterly dividend by more than 9%, which was the company's seventh consecutive annual increase.

The icing on this defense cake? In 2010, Northrop Grumman repurchased 19.7 million shares, showing that management believes in this company's continued growth.

Fiscal Year Ending

Backlog (in millions)

Sales & Service Revenues (in millions)

Dividends Per Share

2010

$64,183

$34,757

$1.84

2009

$69,186

$33,755

$1.69

2008

$76,415

$32,315

$1.57

Source: Company financial statements.

Click here to add Northrop Grumman to your watchlist.

Can't go wrong with utilities
National Grid
(NYSE: NGG  ) , one of the largest electricity and natural gas companies in the United Kingdom, has a lot going for it.

From 2009 to 2010, National Grid increased its revenue by 2%, grew its cash generated from operations by 11%, raised its adjusted operating profit by 15%, and enhanced its earnings per share by 32%.

Plus, compared to peers like Duke Energy (NYSE: DUK  ) and American Electric Power (NYSE: AEP  ) , National Grid's earnings multiples make the stock look cheap.

The good news keeps coming when you consider that between 2009 and 2010, National Grid grew its ordinary dividend by 8%, and has a three-year return on equity average of 11.9%. Plus, with an interest coverage of 3.8, its debt isn't something to worry about.

Click here to add National Grid to your watchlist.

The Foolish bottom line
Unfortunately, there is no guaranteed way to know how a company will do in the future, but by diversifying your portfolio, your chances of success greatly improve.

Want more great stock ideas to diversify your portfolio? Click here to access The Motley Fool's free report, "5 Stocks The Motley Fool Owns -- and You Should Too." These five companies were hand-selected by top Motley Fool equity analysts, and The Motley Fool put real money behind their picks.

Fool contributor Katie Spence likes all the colors of the rainbow. She owns shares of Northrop Grumman and Coca-Cola. She does not own shares of any other company mentioned above. The Motley Fool owns shares of Coca-Cola, Northrop Grumman, and PepsiCo. Motley Fool newsletter services have recommended buying shares of National Grid, PepsiCo, and Coca-Cola, as well as creating a diagonal call position in PepsiCo. 

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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