Setting up a stock portfolio can be a daunting task for new investors, since there are thousands of stocks on the New York Stock Exchange and Nasdaq alone. It can also be tough to tune out all the financial gurus babbling about hot stocks and alternative investments like cryptocurrencies, SPACs, and NFTs.
But creating a starter portfolio actually isn't as hard as it seems. I personally prefer to split my portfolio between three kinds of investments: blue-chip dividend stalwarts, traditional growth stocks, and speculative stocks that either go bust or generate incredible multibagger gains in the future.
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Generally speaking, new investors should allocate more than 90% of their portfolio to blue-chip dividend stocks or traditional growth stocks, and the remaining 10% to speculative stocks. To get started, let's pick one top stock from each category.
1. Coca-Cola: The blue-chip stalwart
Coca-Cola (KO 0.39%) has raised its dividend annually for 59 straight years, which makes it a Dividend King of the S&P 500. Companies join that elite club after raising their payouts annually for at least half a century.
Coca-Cola pays a forward yield of 3.1% today, which is much higher than the 10-Year Treasury's 1.4% yield. It spent 90% of its free cash flow (FCF) on those dividends over the past 12 months.
Coca-Cola might initially seem like a weak investment since soda consumption rates are declining worldwide. However, Coca-Cola has diversified its portfolio with teas, juices, sports drinks, bottled water, and even alcoholic beverages, as well as healthier versions and new flavors of its flagship sodas.
Over the past 10 years, Coca-Cola generated a total return of about 120% after factoring in reinvested dividends. Past performance doesn't guarantee future gains, but its steady growth should continue for decades to come. That's why Warren Buffett is still one of Coca-Cola's top investors.
Coca-Cola's organic revenue and core EPS fell last year as the pandemic shut down restaurants, but analysts expect its revenue and earnings to both rise 12% this year as the pandemic eases. The stock trades at a reasonable 23 times forward earnings, and it remains a great defensive stock to buy and hold.
2. PayPal: The traditional growth stock
eBay (EBAY 1.09%) spun off its payments subsidiary PayPal Holdings (PYPL -1.89%) in an IPO in 2015. Each investor received one share of PayPal for every share of eBay they owned, but PayPal subsequently generated much bigger gains than its former parent company.
Source: YCharts
It might seem risky to chase PayPal after those massive gains, but it's still firing on all cylinders. Last year PayPal's total payment volume (TPV) jumped 31% to $936 billion, its revenue rose 21% to $21.45 billion, and its adjusted EPS grew 31%. Wall Street expects its revenue and adjusted earnings to increase another 21% and 22%, respectively, this year.
PayPal ended the first quarter of 2021 with 392 million active accounts, up 21% from the previous year and reinforcing its position as one of the world's largest digital payment networks. PayPal also recently raised its processing fees for U.S. merchants, which indicates it's confident in the stickiness of its ecosystem and its pricing power in the competitive payments market.
PayPal's stock trades at just over 50 times forward earnings, which makes it cheaper than industry peers Square and Adyen. That balance of growth and value makes PayPal a great long-term investment on the escalating war on cash worldwide.
3. Lemonade: The speculative growth stock
Lemonade (LMND 0.64%) shouldn't be a core holding for new investors, but its disruptive potential is tough to ignore. Its eponymous app streamlines the byzantine process of buying insurance with an AI-powered chatbot that insures users within 90 seconds and processes most claims within three minutes. This simple approach, which bypasses salespeople and unifies home, renters, pet, and life insurance within a single app, is catching on with younger insurance buyers.
Approximately 70% of Lemonade's customers are under the age of 35, and many of them are first-time insurance buyers. Its total number of customers jumped 56% in fiscal 2020, then grew another 50% year over year to nearly 1.1 million in the first quarter of 2021. Its premium per customer also rose 82% in 2020 and increased 25% year over year in the first quarter.
If Lemonade gains tens of millions of new customers over the next few years, it could become a major threat to traditional insurers. It plans to expand into the auto insurance market this year, and a move into the fragmented health insurance market could be game-changing.
For now, Lemonade's stock looks very expensive. It expects its revenue to rise 24%-28% this year, but the stock trades at nearly 50 times that estimate. It won't generate a profit anytime soon, and it's still reeling from claims related to the winter storm in Texas earlier this year.
However, investors looking for a speculative bet that could outperform both blue-chip dividend stocks and traditional growth stocks should take a much closer look at this online insurer.
