Building a rock solid portfolio is just like building a house – it begins with the foundations you lay. If you don't lay solid foundations before you build your house, you run the risk of the building crumbling – your portfolio is no different!
For most investors, laying a solid foundation for their portfolio involves allocating the majority of their portfolio to solid blue-chip dividend-paying stocks. In general, this is a sensible, low-risk strategy. The only time is becomes high risk is if the blue-chips happen to be overvalued!
The following two blue-chip stocks are widely owned and at current prices look like appealing foundation stocks.
Brambles Limited (ASX: BXB) has a very wide customer base which is spread across multiple regions and industries – this creates a very defensive revenue base. The economics of Brambles' business also requires a huge upfront investment to achieve economies of scale – this is wonderful position for an entrenched leader like Brambles to be in, as it dissuades competitors from entry.
With the stock trading on a FY 2015 forecast price-to-earnings (PE) ratio of 20 and a yield of 3.1%, it isn't cheap, but given its quality it looks reasonably priced for long-term investors seeking 'foundation' stocks.
Rio Tinto Limited (ASX: RIO) is one of the world's largest miners with a market capitalisation of $122 billion. Rio is a good reminder to investors that even blue-chip stocks don't always make good investments. Investors who purchased at the top of the resource boom in 2008 at $150 per share are still very much underwater at today's price of $65.80. Despite the share price decline however, Rio remains one of the lowest cost producers – this is an important competitive advantage.
The stock is trading on a forecast FY 2015 PE of 11.4, a fully franked yield of 3.5% and with the resource bubble popped, this point in the cycle would appear a reasonable entry point for long-term investors.
