Does Your Portfolio Have a Balanced Diet?

Recently, my family visited a fairly upscale restaurant for dinner, where we paid an exorbitant five-star bill for food that was at best three-star quality. It didn't help matters that the waiter mistakenly switched our orders, and my wife accidentally finished half of mine before either of us had even noticed. I might have spotted the mix-up earlier, but was instead just starting on my dinner salad, which was brought precisely 30 seconds before my entrée arrived -- and about an hour after I first ordered it.

There's nothing wrong with splurging every now and then on a nice meal, but when you sign your name to a dinner tab that could easily be mistaken for a zip code, it is simply assumed that the experience will be commensurate with the price. However, when it falls short of expectations, for whatever reason, it is difficult not to feel somewhat cheated. In this way, it can be difficult for extravagantly priced establishments to really overdeliver. So what if the food is sensational and the service is exemplary -- it's supposed to be. However, if the meal is merely adequate, then there will inevitably be some sense of remorse when the check arrives.

On the other hand, it's fairly easy for lesser-priced eateries to surprise us to the upside, and very hard for them to truly disappoint -- short of dropping a severed finger in our combo meal. For example, if McDonald's (NYSE:MCD) slides me a cheeseburger across the counter that wasn't prepared to my specifications, I would probably shrug it off without much thought, and be content that at least the fries were still warm.

Dining on high-class stocks
Investing can be similar in many regards. When a stock is priced for perfection, it is forced to deliver exactly that. Anything short of the mark -- such as, say, a penny on the earnings-per-share side -- will often trigger a far more hostile reaction than an undervalued company reporting similar news might see. Just as a gourmet restaurant has a sterling reputation to defend, stocks trading at stratospheric multiples due to equally outsized growth rates have practically no margin for error, and the slightest misstep will draw the ire of angry customers. Except in this case, miffed stockholders will express their disapproval by unloading their shares.

For example, just last week patrons at trendy Apple Computer (NASDAQ:AAPL) turned their collective nose up at the latest numbers dished out by the company. Fourth-quarter results released after the bell on Tuesday seemed savory. Brisk sales of more than 6.5 million iPods helped revenues surge 57% to $3.68 billion, while net income quadrupled to $430 million. Both measures marked the highest quarterly totals ever for the company, but top-line revenue growth was served a degree or two cooler than investors would have liked, and the shares initially tumbled 10% lower as a result.

On the flip side, we sometimes grow so accustomed to seeing soft results from a poorly performing company that even unpalatable numbers fail to send anyone scurrying for the door. About the same time that Apple released sales figures that some of the more discerning shareholders found lukewarm, Pier 1 Imports (NYSE:PIR) delivered a stone-cold 10.6% decline in September same-store sales and warned that this month was looking even less appetizing. However, the sluggish home decor retailer has ratcheted its earnings outlook lower a staggering total of 12 times over the past 12 months, and with analysts expecting a sharper decline, the stock barely budged on the news.

Now, I'm not suggesting that anyone trip over Apple on their way to buying Pier 1. Building a portfolio full of troubled companies just because they happen to be cheap is little different than eating every single meal at the Golden Arches. And just as it can be a welcome culinary change to go overboard on an expensive dinner every now and then, adding a few high-octane growth stocks can help juice your returns -- but I wouldn't anchor my portfolio with them.

Instead, why not feed mostly on a steady diet of companies somewhere in the middle, those unlikely to serve pancreas or have a snooty wine sommelier, but still able to make a decent meatloaf and pass a health inspection with flying colors? In other words, firms such as Johnson & Johnson (NYSE:JNJ).

While the shares aren't exactly priced at rock-bottom valuations, they are trading near their lowest levels in five years and stack up well against industry rivals. The blue-chip consumer products and pharmaceutical giant has a diversified revenue stream, a healthy balance sheet, superior margins, and a reliable track record of posting double-digit earnings growth every year for the past two decades -- with more of the same projected for the next five.

Such companies resemble a favorite dining spot that can always be counted on for a good meal at a reasonable price -- even if they don't serve an award-winning Lobster Thermador.

Can I refill your dividends?
Of course, there's more to a great dining experience than just the food.

Call me crazy, but I'm one of those people who would never use Outback Steakhouse's (NYSE:OSI) curbside takeout service. Why? Because I believe the total package involves far more than just the steak -- there's also the unique ambience, the ice-cold Foster's draft beer, and a very attentive and courteous waitstaff eager to bring me whatever else I may need.

While even a delicious meal can quickly unravel with a side of poor service from a neglectful waiter, exceptional service can just as easily put a smile on our faces -- even if the food was only marginal. Similarly, a hefty dividend check can go a long way toward offsetting weak performance on the capital appreciation side or sweetening the total returns of even the strongest stock. And just as the quality of service can make or break a meal, dividend payments can sometimes mean the difference between an average investment and an outstanding one.

For example, Johnson & Johnson has generated enough cash to bump up its dividend payout at a healthy 14.7% annual clip over the past five years to reach a yield of 2.1%. Those steadily rising quarterly dividend payments have helped the company achieve a market-beating 14.8% compounded annual gain over the past decade.

Leaving the table satisfied
That's not too shabby, but there's always room for improvement. Head chef Mathew Emmert has whipped up one delectable dish after another to please the demanding critics at Motley Fool Income Investor. While he won't reveal his secret recipe, nearly all of his picks include the following key ingredients: experienced and trustworthy management teams, above-average yields funded by sustainable cash flows, strong but not excessive payout ratios, and promising growth prospects.

With a sprinkling of chart toppers such as Alliance Capital Management (NYSE:AC) and a few dashes of high-yielding REITs such as American Financial Realty (NYSE:AFR), the portfolio carries an average yield of more than 5.1% and has delivered an average gain of more than 10%. By comparison, the S&P's 5.9% return over the same period seems rather bland.

Interested in finding a few high-yielding picks with attractive capital appreciation potential to help spice up your portfolio? Click here to smell the cooking at Motley Fool Income Investor, and odds are good you'll want to sample it. We'd even like to give you the first taste gratis.

Fool contributor Nathan Slaughter is thinking of dining out tonight. He owns none of the companies mentioned. The Fool has a disclosure policy.