Building A Foundation

     Just like building a home, a portfolio must have a solid foundation. This means selecting a few solid stocks that pay a decent dividend and have a sustainable business model. Look for companies that have been in business for 50 years or more and have a record of increasing their dividend for most of that time. Be careful to not choose companies that are cyclical in nature. Choose companies that can sustain sales in good times and bad. Some would call these defensive stocks because consumers will continue to use their products no matter what the economy is doing. People will always take the medicine needed to keep chronic illness at bay, homemakers will always buy soap and cleaning supplies, millions of cars on the road will need gasoline, online merchants will need delivery services like UPS and FedX. Modern life demands these products. I don't see our society suddenly rejecting cell phones and the internet. These things have become what we consider necessities. The foundation of your portfolio should be in large-cap stocks that provide some of these products and services. Their size is a guarantee that they will survive competition from smaller companies. Many large technology companies simply buy out serious challengers. The dividend is important because after several years of holding one of these foundation stocks, your yield could top 10,20 or even 30%. How could that be? Remember, your yield is based on the price you paid for the stock, not the current price. If your stock has appreciated and the dividend has been steadily increased each year, the annual dividend divided by the price you paid for the stock is your yield. Eventually, you will enjoy hefty yields on solid companies that resist downturns. In a bear market, usually all stocks suffer, but defensive stocks should hold up better. This is also an opportunity to buy more of your favorite foundation stocks at fire sale prices. Once you have a solid foundation, then the more speculative issues can be added to round out the total portfolio. My next post will talk about home ownership,inflation and relationships with financial professionals.