Man smiling and working on laptop
Whether investing for growth or passive income, putting all your capital in a handful of stocks is a high-risk strategy. Even the sturdiest of FTSE 100 stocks can endure bumps in the road that lead to disappointing shareholder returns.
Billionaire investor Warren Buffett is famous for not diversifying too much. When he sees a company he likes at a fair price, he piles in. Today, more than 60% of the capital in his Berkshire Hathaway fund is tied up in two stocks. Apple and Bank of America.
But the ‘Sage of Omaha’ knows the benefit of spreading risk (and realising investing opportunities) by owning a range of companies. His investment firm holds stakes in more than 40 different stocks.
That said, there can be value in pretending that I’ll invest in just one or two stocks. Doing this when choosing stocks to buy can improve the selection process and, in turn, improve the long-term returns I make.
2 top stocks
If I were to invest all my money in just a couple of shares, I would seek businesses with market-leading positions in defensive sectors and multiple revenue streams. They would also need to have robust balance sheets that they can use to invest for growth and pay dividends to shareholders.
Here are two such companies I think tick all these boxes.
Diageo
The first pick is Diageo (LSE:DGE). This is one of the Footsie’s true Dividend Aristocrats, with shareholder payouts having risen every year for almost 40 years.
Created with TradingView
The drinks maker’s proud dividend record is underpinned by consistent long-term earnings growth and reliable cash flows. At group level, revenues tend to remain steady at all points of the economic cycle, reflecting the stable nature of alcohol demand.
On top of this, Diageo owns some of the industry’s most popular brands including Smirnoff vodka and Captain Morgan rum. These labels have significant pricing power, allowing the company to raise prices without a significant loss of volumes, helping it grow profits even in tough times.
Competition’s fierce in the drinks sector and that’s a big risk. But thanks to its colossal marketing budgets — it spent £3.1bn in the last financial year alone on advertising – the Guinness manufacturer has so far been able to significantly mitigate this threat.
National Grid
Another FTSE 100 stock I’d choose for passive income is National Grid (LSE:NG.).
Like Diageo, earnings here stay brilliantly consistent most years. Electricity’s one of life’s essential commodities, and this business has a monopoly on keeping the power grid in good working order. This makes the company one of the most dependable blue-chip stocks out there.
This is illustrated in National Grid’s strong record of dividend growth. As you can see, it’s raised cash payouts almost every year for the past two decades.
Created with TradingView
The drawback is that maintaining the power network and building for the green transition requires vast sums. And in November, National Grid raised its spending target to £42bn through to 2026.
But all things considered, I think this a top defensive stock to add to a passive income portfolio. As with Diageo, I’d happily invest a huge wad of cash in this FTSE 100 superstar.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions,
he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy
— and discover:
- Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
- How to potentially get paid by the weather
- Electric Vehicles’ secret
backdoor
opportunity - One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Royston Wild has positions in Diageo Plc. The Motley Fool UK has recommended Apple and Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
News Related-
Up to 40 Tory MPs ‘set to rebel’ if Sunak’s Rwanda plan doesn’t override ECHR
-
Country diary: A tale of three churches
-
Sunak woos business elite with royal welcome – but they seek certainty
-
Neil Robertson shocked by bad results but has a plan to turn things round
-
Tottenham interested in move to sign “fearless” £20m defender in January
-
Bill payers to stump up cost of £100m water usage campaign
-
Soccer-Venue renamed 'Christine Sinclair Place' for Canada soccer great's final game
-
Phil Taylor makes his pick for 2024 World Darts Championship winner
-
Soccer-Howe aims to boost Newcastle's momentum in PSG clash
-
Hamilton heads for hibernation with a word of warning
-
Carolina Panthers fire head coach Frank Reich after 1-10 start to the season
-
This exercise is critical for golfers. 4 tips to doing it right
-
One in three households with children 'will struggle to afford Christmas'
-
Biden apologised to Palestinian-Americans for questioning Gaza death toll, says report