With £2,000 to invest, I’d likely put the entire amount in one new stock position as part of an existing diversified portfolio. Or, if the money was my first sum to invest, I’d split it between two stocks to start a new portfolio.
When choosing stocks, one guiding principle I aim to follow is to spread investments between several sectors. The market often surprises me. And the best gains sometimes come from industries I’m not expecting to perform as well, at least in the shorter term.
Consumer defensive
But whatever the sector, I aim to focus on businesses with good quality, value and operational momentum. For example, in the consumer defensive sector, Diageo (LSE: DGE) is down from its recent high. Yet the underlying business is trading well. And City analysts have pencilled in double-digit advances in earnings ahead. However, at 3,666p, the stock is up by around 25% over the past year.
The business model is built around supplying premium alcoholic drinks with strong brands. And the company has an impressive trading and financial record with consistent, multi-year gains in revenue, earnings operating cash flow and shareholder dividends.
On top of those attractive qualities, shareholders stand to gain from the company’s ongoing share repurchase (return of capital) programme. In February, the directors announced the third phase of the programme “of up to £4.5bn” to be completed during 2023.
Previously, in January, the company reported “strong net sales growth across all regions”. And that’s the kind of outcome we’ve become used to from Diageo.
It’s not certain that the Diageo business will keep growing in the years ahead just because it has done well in the past. Operational challenges could arise to stall progress or consumer habit could change. However, I’d embrace the risks and consider the stock for my portfolio now.
Oil and gas
I’d also aim to participate in the booming commodities sector. And to do that I like the look of big oil and gas company Shell (LSE: SHEL). I think the demand for energy will likely keep oil and gas prices elevated for some time. And if supply disruptions occur, there will probably be even more upwards pressure on prices leading to greater profits for Shell.
The company is another in the middle of buying back some of its own shares. In January, the directors announced the commencement of the programme worth $8.5bn for the first half of 2022.
But on top of that, shareholders will benefit from a healthy dividend. With the share price at 1,955p, the forward-looking yield for 2023 is just below 4%. But analysts’ assumptions can change. And profits and dividends could fall if commodity prices plunge.
Indeed, one of the biggest risks for Shell shareholders is that commodity prices are usually volatile. And that can lead to erratic performance for cash flow, profits, dividends and the share price.
Nevertheless, Shell tempts me right now and I’d dig in deeper with my research with the aim of adding the stock to my diversified portfolio.