If you are looking to invest $1,000 today, you could go all in on one stock and hope for the best. Or you could break it up across a group of stocks, trying to add some balance to your approach. The latter option is probably the better one for most investors.
Right now, consumer staples icons Hormel Foods (HRL 0.14%) and Procter & Gamble (PG -0.78%) offer good examples of what you can achieve with just two stocks.
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Spreading your bets
Diversification is a powerful and fairly easy-to-use risk management tool. In plain English, you are spreading your eggs across multiple baskets so that one basket falling doesn't cause too much pain. There are a number of ways to diversify a portfolio, including by asset class, sector, and individual stock selection.
To keep things simple, we'll look at two stocks from the same broad sector and see how they might work well together.
Hormel is a food maker with a large portfolio of well-known brands, including SPAM, Columbus, and Skippy, among many others. With over 55 years of annual dividend hikes, it is a Dividend King. The average annual dividend increase over the past decade was a huge 13%. Even the most recent hike, which occurred during a difficult period for the company (more on this below), was a pleasing 6%. If that's what hard times look like on the dividend front, most dividend investors should still be pretty pleased.
Procter & Gamble, often just called P&G, makes consumer products like towels, toothpaste, and sanitary products. It owns brands like Bounty and Crest, among many others. The company has been operating at a high level of late, executing well in a difficult market. The dividend has been increased annually for over 65 years (it, too, is a Dividend King), with a compound annual growth rate of 5% over the past decade.
P&G is more of a slow and steady performer, dividend-wise, than Hormel, which has a notably higher long-term dividend growth rate. Both are well-run companies that should be just fine over the long term if history is any guide. But the story today is a bit more interesting.
Mix and match
Some investors might argue that P&G's current, strong performance makes it a better choice than Hormel. That's not unreasonable -- P&G has been able to pass on price increases without material pushback from consumers. To put a number on that, it was able to grow organic sales in each of its product categories in the first three quarters of fiscal 2023.
P&G's dividend yield is around 2.5%, which is about the middle of the road historically speaking. But companies don't outperform forever, so at some point P&G's strong results will cool -- and so, too, will investor sentiment surrounding its stock. That could take what appears to be a fair price down to a cheap one, hurting investors that went all-in today.
That's where Hormel comes in. Hormel isn't having nearly as much success passing rising costs on to consumers right now. Sales dropped 4% and volume was down by 6% in the fiscal second quarter, leading to a 17% year-over-year decline in earnings per share. Investors have not been pleased, as you might expect, and the stock has been punished.
That, however, has pushed the dividend yield up to a historically high 2.7% or so, hinting that the stock is cheap today. The problems the company faces are likely transitory, including inflation, avian flu, and the integration of a newly acquired brand. If you bought Hormel alone you'd be hoping for a turnaround.
What if you bought both Hormel and P&G? Both have similar dividend yields, so you wouldn't be giving up yield. Hormel has a higher dividend growth rate, so you would be augmenting the slow and steady dividend growth from P&G. P&G is performing well today, which would be a ballast against the weak performance at Hormel. When Hormel's business picks up, it could help to offset any decline in performance at P&G.
And while they are both consumer staples stocks, they actually operate in different segments within the broader sector (food versus personal care products), so there isn't as much business overlap as you might think. The overall benefit of owning both stocks would seem like a good risk/reward trade-off.
Just one example
There's no simple answer when it comes to investing, but spreading your bets out with a thoughtful diversification approach is likely to be an easy win. Hormel and P&G is just one pairing of stocks, but it is one that's actually worth looking into if you are trying to invest $1k today. They are both solid companies with strong histories, but given their different business-level performance today you can use them together to create a stronger overall portfolio.
