Building a portfolio from scratch can be a daunting prospect. So to help, here are five top picks that have been selected for their market-leading qualities.
Building the foundations
Every portfolio should be built on the foundations of several well-established large-cap stocks, to provide both stability and a regular income. British American Tobacco (LSE: BATS) and SABMiller (LSE: SAB) are two perfect foundation stocks.
Both British American and SAB have established, defensive businesses that have proven themselves over time. What’s more, these two companies have put shareholder returns at the top of their agendas. As a result, British American and SAB have outperformed the FTSE 100 by 14% and 11% per annum respectively for the past 15 years including dividends. You’d be hard pressed to find returns like these elsewhere.
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Unfortunately, with such an impressive record of growth behind them, British American and SAB don’t come cheap. British American and SAB trade at forward P/Es of 17.4 and 22.9 respectively and yield 4.3% and 2.2%. As these companies have proven that they are a safe haven in stormy waters, it could be worth paying the high price.
Income and growth
With a backbone of defensive stocks in place, income is next on the agenda. Tate & Lyle (LSE: TATE) and Admiral Group (LSE: ADM) are two of the best income stocks around.
Admiral has paid out a total of £1.1bn to investors or around 90% of net income generated to investors via dividend during the past five years.
This trend is set to continue into 2015 and 2016. Analysts expect Admiral’s dividend payouts to total 89.5p per share for 2015 and 93.8p for 2016, equal to a yield of 6.1% and 6.4% respectively. The company currently trades at a forward P/E of 15.8. Including dividends Admiral’s shares have returned 19.2% per annum for the past decade.
Tate’s returns are not as impressive as Admiral’s. However, the company currently supports a dividend yield of 5.5%, and the payout is set to rise in line with inflation for the next two years.
Tate’s earnings are expected to fall by 11% this year as the company has been struggling with some supply-chain issues. These issues are not expected to last into 2016 and City analysts believe that the group’s earnings will return to growth next year. Tate currently trades at a forward P/E of 14.9 and 2016 P/E of 13.6.
Rapid growth
My final share for success is Dixons Carphone (LSE: DC).
Dixons is a growth stock. After merging with Carphone Warehouse last year, Dixons’ earnings have surged a 46% over the past year. Management is planning to open four new stores each week across Dixons’ international footprint. Based on these plans for growth, City analysts expect Dixons’ earnings per share to expand at a compound annual rate of 8% through to 2017.
Dixons currently trades at a forward P/E of 16.3 and is set to support a dividend yield of 2% this year.
However, as Dixons has a number of growth initiatives underway I’m inclined to believe that the company’s growth will surpass City expectations.
For example, the company is already ahead of its own target to achieve merger synergies of £80m by 2016/17, has launched a new mobile network and signed a deal with US telecoms firm Sprint, which could eventually see it open 500 stores in the US. With all these plans in place, Dixons’ future growth could easily exceed expectations.
