Here at the Motley Fool, we’re always advocating the benefits of diversification. But while having a well-diversified portfolio is the goal, I’ve built my portfolio around a number of core stocks, which in total amount to 40% of my equity holdings.
The reason for this approach is simple. By having a portfolio base made up of businesses that have a solid track record of producing returns for investors, I can rest safe in the knowledge that these investments will provide steady returns while taking on more risk in the balance of the portfolio.
An income champion
Imperial Brands (LSE: IMB) is one of my top three holdings for reasons that are apparent to all of the company’s existing shareholders. The company is an income champion and has an impressive history of return capital to shareholders.
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Between 1997 and 2016, shares in the company rose from 300p to 3,700p, a gain of 14% per annum. At the same time, the company’s dividend payout per share has increased by 11% per annum. A £15,000 investment back in 1997 would be throwing off £7,000 each year in dividend income today, and the capital value would have grown to £185,000.
There’s no guarantee that these gains will continue, but considering everything that’s been thrown at the tobacco industry during the past two decades, it’s clear Imperial can handle itself. The shares currently trade at a forward P/E of 13.8 and support a dividend yield of 4.6%.
Asset-light business
Like Imperial, Lancashire Holdings (LSE: LRE) has an excellent record of rewarding shareholders. Insurance companies are some of the most profitable businesses around, and Lancashire is at the top of the pile when it comes to profitability.
Specifically, the firm’s strict underwriting standards mean its combined ratio — the ratio of underwriting profits to claims paid out — is consistently under 100% (a ratio below 100% signals underwriting profitability) and has averaged 70% for the past five years.
Lancashire’s hugely profitable operations also require little in the way of capital spending, so most of the firm’s profits are returned to investors.
For the past three years, the group has returned more than 100% of income to shareholders via dividends and since the beginning of 2011 Lancashire has returned £5.02 per share to investors via dividends. If you had acquired 100 shares in Lancashire at the beginning of 2011 for £544 and reinvested all dividends, today you’d have a holding worth £1,301 for a total return of 139.2%.
Unless the company suddenly decides to change its formula for success for the past five years, I expect these returns to continue.
Cash cow
Just like Lancashire, Air Partner (LSE: AIR) is a capital-light, high-returns business that’s chucking out cash. At the end of July 2016, the firm reported a net cash balance of £5.2m after the payment of dividends and acquisitions, up 274% year-on-year.
Over the next 12 months, City analysts expect the company to pay out 5p per share in dividends, equal to a dividend yield of 4.3% at current prices. Air Partner’s strong cash balance should reassure investors that the payout is here to stay. For the year ending 31 January 2017, the firm’s earnings per share are expected to grow by 26%, and analysts have pencilled-in a further 16% growth for 2018.
