Historically, the market has returned roughly 10% including inflation. However, there are times when the market tanks.
Examples include the financial crisis of 2008-2009 and the Internet bubble burst that caused the general market to fall in 2000-2002.
If you’re worried about those uncommon but real tanking-market situations, there’s something you can do about your portfolio, so you can get more consistent returns: build a diversified portfolio of quality businesses.
Your portfolio can consist of income stocks that always generate a positive return in the form of cash dividends, growth stocks with above-average growth rates, and stocks with above-average yields that grow at a moderate rate. The last category of stocks has a balance of income and growth.
You can allocate, say, 20% of your portfolio to income stocks such as preferred shares and real estate investment trusts (REITs). It’s not uncommon to find REITs that yield 8%.
For instance, NorthWest Health Prop Real Est Inv Trust (TSX:NWH.UN) yields 8.3% at $9.65 per unit. Its adjusted-funds-from-operations payout ratio has been improving and now sits at 92%.
Additionally, it holds a high-quality portfolio of 120 healthcare properties in Canada, Brazil, Australasia, and Germany with a high occupancy rate of 96.1%. So, its high distribution should be sustainable.
Income-focused holdings like NorthWest can help stabilize your portfolio’s returns (in the form of cash distributions), especially in down markets.
Investors can buy NorthWest at a fair valuation today.
You can allocate 30% of your portfolio to growth stocks, such as Express Scripts Holding Company (NASDAQ:ESRX). Investors should be pleased to know that Express Scripts, the largest pharmacy benefit manager in the U.S., is priced at a discount today.
Although it doesn’t pay a dividend, it’s only priced at 12.7 times its earnings, while it’s expected to grow its earnings by 10-12% in the medium term.
We can’t choose when a stock’s share price will go up, but by buying quality, discounted stocks with the goal of capital gains, investors can boost their portfolio returns over the long term.
Stocks with a balance of income and growth
You can allocate 50% of your portfolio to stocks that exhibit a balance of yield and growth. For example, TransCanada Corporation (TSX:TRP)(NYSE:TRP) yields 4.2%, and it expects to grow its dividend by 8-10% per year through 2020.
Its dividend is covered by its earnings and cash flows. Based on its forecast growth rate, it offers a potential return of 12-14%. If TransCanada dips to roughly $45.20 for a yield of around 5%, it’d be a strong buy.
By buying and holding a diversified portfolio of quality stocks with income and growth components, your portfolio should generate consistent returns no matter what the market or economy is doing.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Kay Ng owns shares of Express Scripts, NORTHWEST HEALTHCARE PPTYS REIT UNITS, and TransCanada. The Motley Fool owns shares of Express Scripts.