The reason we should have a balanced group of stocks is to protect us from the unknown.
The unknown being what the market will be like next year, what stock in our portfolio is going to blow up in our face and what will turn out to be our best investment of the decade.
Even if you were super-confident in one stock, putting all your investing money into just that one would still be a mistake. You may be right about the stock, but wrong about the timing.
It could be a really great business, yet maybe the market has other ideas about it and the stock goes nowhere for a year or two.
As time passes, you get tired of waiting and maybe even sell out at a lower price…just before it starts to climb.
Spreading potential gains among a number of promising stocks keeps yourself psychologically sharp. That's important because you can second-guess yourself out of good stocks at the worst times.
To help you create balance in your power portfolio, here are two stocks each for growth and solid dividend income that have what I look for in quality companies.
— Growth
1. SEEK Limited (ASX: SEK) operates the seek.com.au job search website – the market leader for employment hunters. It has been quite successful in Australia, but it sees great growth potential in Asia. Its businesses in Singapore, Kuala Lumpur and Hong Kong have shown solid gains, helping the company increase underlying net profit 27% in FY 2014. The stock pays a 2.0% fully franked yield, but the real attraction is the double-digit earnings growth forecast by analysts over the next two years.
2. Oil Search Limited (ASX: OSH), the energy producer, owns a 29% stake in the big PNG LNG project which has just started exporting LNG to Asian customers. The sales revenue will dramatically rise and earnings are expected to be significantly higher in the next several years. There is even the possibility of expanding the project's output even more in the future. Its current 22 price-earnings ratio is near six-year lows, so I think the stock is at a good price level.
— Dividends
1. BWP Trust (ASX: BWP) owns and manages the commercial property sites that the successful Bunnings Warehouse DIY Hardware stores use. Over the past ten years it has given shareholders a total return of an average 10.5% annually. As the number of Bunnings stores increase, so the property portfolio of this trust grows. It pays a 6.4% unfranked dividend. Bunnings is still the number one hardware chain, which keeps BWP Trust's income steady and growing.
2. Insurance Australia Group Ltd (ASX: IAG) has a 6.4% fully franked yield that is hard to ignore. It is the market leader in general insurance and its recent acquisition of Wesfarmers Limited's (ASX: WES) insurance underwriting business has made that lead even bigger. Its insurance margins are improving. In FY 2015, the company expects its gross written premium (the amount of premiums it collects) to increase 17% – 20%. That's a good sign for further earnings and dividend growth.
