The volatility that has rocked the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) in recent months should be enough to highlight the importance of building a solid foundation for your portfolio, made up of some of Australia's strongest corporations.
Although they may not be as exciting as holding growth or speculative stocks (given their sheer size and therefore an inability to grow as quickly), they are considered to be more defensive in nature, protecting your wealth through the good times and the bad. For instance, say another recession were to hit – the market normally sells off the riskier assets in favour of the companies they consider to be safer, given their more dominant market positions and stronger cash hoards to survive the toughest conditions.
Before you go rushing out to buy some of the more traditional blue-chip corporations however, due diligence must be applied whereby you consider the companies' strengths, as well as their relative share prices. For example, although the big four banks are amongst the strongest corporations in Australia, each are trading at inflated prices meaning now is not the best time to be buying.
Here are three companies that you should consider instead:
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) is a conglomerate of both listed and unlisted businesses, with its three major holdings being Brickworks Limited (ASX: BKW), TPG Telecom Ltd (ASX: TPM) and coal mine operator New Hope Corporation Limited (ASX: NHC). Although its major investment in New Hope is currently weighing down earnings, it maintains a solid balance sheet and strong cash flows and offers an attractive 3% dividend yield.
Furthermore, according to its recent half-year reports, the company has a cash balance of $82.9 million as well as short-term term deposits worth $1.32 billion. With that in mind, should an attractive investment opportunity present itself, Soul Patts is in a prime position to capitalise.
Another company which doesn't come straight to mind at the mention of blue-chip stocks is Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) – a developer and manufacturer of products for the treatment and management of respiratory disorders. The company recently raised its full-year earnings guidance and announced it would be expanding its Mexican manufacturing facility as it positions itself at the forefront of the industry to treat respiratory disorders.
While its shares have risen substantially over the last three years or so, Telstra Corporation Ltd (ASX: TLS) is still a very attractive company. In addition to its fully franked 5.6% dividend yield, the company continues to outpace its primary competitors and will continue to benefit as society becomes more and more reliant on broadband services.
Foolish takeaway
While a strong foundation for your portfolio is imperative, it is equally important to buy companies when they are trading at reasonable prices. Each of the companies mentioned above should be considered at today's prices.
