When it comes to investing in stocks, there are relatively few “perfect” strategies, and that’s because you can’t plan for every eventuality. That’s not a risk or a point against stock investing; it’s an important truth every investor should understand before entering the market. When you start seeing investments through this realistic lens, your expectation and portfolio planning might become more potent.
Let’s take the current atmosphere of the market as an example. Right now, some investors and experts believe that we might see another correction or a dip in the market, especially once the effect of stimulus runs out. Or, if not a dip, the market might stay stagnant for a relatively long time.
Others believe that the market has recovered adequately enough. Once the economy recovers to a certain level and the gap between the two is bridged (to a certain extent), the market will see more stable growth.
If you don’t think there is adequate data to predict either of the outcomes with relative surety, or you think both are valid possibilities, the most pragmatic approach would be to plan for both.
A stock for a “stale” market
If you believe that the market might stay stagnant for a few years, you might consider adding a generous dividend stock to your portfolio. Nexus REIT (TSXV:NXR.UN) is a decent contender. This little REIT with a market capitalization of just $280 million has a few things going for and against it. One major flaw with this stock is the enormous $468 million debt.
But the balance sheet of the company is strong, and its revenues are quite consistent. The stock is also quite undervalued, with a price to earnings of 4.2 and a price to book of 0.8. The company offers a generous 7.86% yield at a stable 32% payout ratio. And even though capital growth isn’t exactly a “forte” of Nexus, it still offers a decent five-year CAGR of 14%.
A stock for a growing market
If you believe that the stock market might keep recovering, and you want to add some growth to your portfolio as well, FirstService (TSX:FSV)(NASDAQ:FSV) might be a stock worth considering. FirstService is a Dividend Aristocrat, but the 0.46% yield might not make it worth your investment capital. The strength of this real estate management company lies in its rapid growth.
The company has a five-year CAGR of 29.26%. Just five more years at this pace, and the company can turn your one-time $10,000 investment into a $35,000 nest egg. This growth history and potential come at a high cost. FirstService is currently trading at a price to earnings of 71.6 and a price to book of 9.5. The revenue and gross profit of the company are also growing consistently.
Even though dividend stocks and growth stocks can’t be compared on equal grounds and merits, and the ideal investment would be the one that can bring you the best of both, but we don’t live in a perfect world. That’s one of the reasons why so many investors leverage diversification as the go-to investment strategy. It allows them to consolidate different profitable elements that the stock market has to offer into one portfolio.
Speaking of stocks you can choose for a stagnant or growing market...
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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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends FirstService, SV.