All that work finding a job finally paid off. You're doing well enough to pay your bills and have a bit of extra money left over. What should you do with it?
It's time to build your very own stock portfolio and let your hard-earned paycheck work for you.
First and foremost, if you work for a publicly traded company, your first impulse might be to buy your company's stock. However, I recommend allocating no more than 10% to 20% of your entire portfolio to your company's stock. You may not have heard of Enron, but employees who invested in the company saw losses of more than 90%.
Diversify, diversify, diversify
Diversification is key. An effective portfolio will have different industries like tech, consumer goods, industrials, finance, or health care. You could start with buying a few shares of Berkshire Hathaway (BRK.B -0.68%). This insurance giant has an $89 billion diversified portfolio, tech (IBM), consumer goods, (Coca-Cola), and financials (Wells Fargo) as its biggest holdings. The company owns 55-plus companies as subsidiaries, from Dairy Queen to Justin Boots.
Its leadership is assured, should something happen to venerable octogenarian chairman and CEO Warren Buffett. By the way, his annual letter to shareholders is an entertaining must-read, especially if you own the stock.
Berkshire's main business is property and casualty insurance and reinsurance, and they do it better than almost anyone. Buffett explains: "If the insurance industry should experience a $250 billion loss from some megacatastrophe -- a loss about triple anything it has ever experienced -- Berkshire as a whole would likely record a significant profit for the year because it has so many streams of earnings"
The main drawback to Berkshire Hathaway is that it doesn't offer a dividend, but the share price has more than doubled since its recessionary lows.
Money never sleeps
Consider adding some dividend-paying stocks and reinvesting your dividends. Reinvesting your dividend payouts in more stock can rapidly accelerate your portfolio's returns. Even without dividends reinvested, a $100,000 stake in Procter & Gamble (PG 0.68%) bought in 1991 would have grown to $1.182 million in 20 years.
This is a "defensive" stock, which means it is considered relatively safe because people will always need its products, regardless of economic conditions. A defensive may not move much in good times, but it will protect your portfolio in bad times and rarely experience wild price swings (a.k.a. volatility). P&G is also a "dividend aristocrat" -- a company that has raised its dividend for at least 25 consecutive years. P&G has raised its payout for 57 years running, and it now yields 3.1%.
But you don't want to buy any stock solely for its dividend. Procter & Gamble has grown EPS by 7.9% annually for the last decade. The multinational consumer-goods giant initiated a $10 billion cost-savings and workforce-reduction program last year, intended to run through 2016. It's a respected brand around the world, making inroads in emerging markets, and half of its 50 brands generate $1 billion-plus in annual sales. It's still a stretch for growth beyond single digits -- but dazzling capital growth isn't why you buy Procter & Gamble.
Another common portfolio staple is consumer tech giant Apple (AAPL 1.27%), which offers a dividend yielding 2.5% and trades at a low price-to-earnings multiple of 12.2 (a simple valuation metric, comparing share price to how much the company earns).
Apple has been volatile as pundits say its growth days are over. Understand this: Tech companies have development pipelines that must be filled with ever more innovative and improved products. Apple offers regularly refreshed versions of its iPhone, iPad, iPod, and Mac line of computers.
Don't be scared off by its price, near $500. You can make just as much money from a share of Apple as from 10 shares of a $50 stock. In the long term, you should feel safe owning Apple, with its high net profit margin of 22.3% and five-year revenue and earnings-per-share growth rates of 42.39% and 55.21%, respectively.
Health care is a growing sector. You might be tempted by a hot speculative biotech, but that's not usually advisable for the beginning investor. Boring as it may sound, Johnson & Johnson (JNJ -0.69%), another dividend aristocrat with a yield of 3%, could serve you well. You may be familiar with its consumer products division, which includes Band-Aids and baby products, but that's only 20% of its sales.
J&J's pharmaceuticals and medical devices are its growth pipeline. Cancer drug Zytiga, immunology blockbuster Remicade, and diabetes contender Invokana should keep bringing in profits for years to come. As for medical devices, last year's purchase of orthopedics company Synthes is a growth catalyst.
To round out your portfolio with an industrial stock, consider conglomerate and dividend aristocrat 3M Company (MMM -1.05%), which has raised its dividend since 1959 and currently yields 2.1%. You know 3M best for tape and Post-its, but it serves such disparate industries as energy, health care, transportation, and communications.
The company has a higher-than-industry-average net profit margin of 15%. Its EPS and revenue growth rates don't compare to Apple's, but they're good for an industrial at 5.92% and 4.5%, respectively.
Let your hard-earned paycheck work for you
With a diverse selection of solid blue-chip stocks, you can worry less about your new portfolio and more about dazzling the new boss. Congrats!
