Diversification is one of the most powerful investing strategies around. Unfortunately, many investors do not diversify in the right way.
To explain, most investors diversify by investing in mutual funds. Ironically, 85% of active mutual fund managers made less money than the S&P 500 for 10 years in a row, MSNBC claims. In detail, over eight out of 10 active mutual fund managers underperformed the S&P 500 every year from 2009 to 2019, S&P Dow Jones Indices estimates.
In fact, 64.49% of mutual funds underperformed the S&P 500 for nine years in a row. Astoundingly, 92% of mutual funds underperformed the S&P during the 15 years between 2004 and 2009.
Fund managers perform poorly because the managers are human beings. Prejudices, lack of knowledge, and arrogance, warp the thinking of fund managers.
The Power of Diversification
Despite the fund managers’ limitations diversification is still one of the best investing strategies around.
Simply, diversification is not putting all your eggs in one basket. Mutual funds and exchange-traded funds diversify by investing in packages of stocks. For instance, buying shares in all the major tech companies.
People diversify to lower the risk of investment. For example, you could buy several tech stocks, several financial stocks, and several retail stocks to limit your exposure to risks from different segments of the economy. Ideally, the financial stocks could make money when the tech stocks lose money.
Interestingly, there are companies with diversified businesses that operate in many businesses. Moreover, some diversified companies make a lot of money. Thus buying these companies’ stock could be a cheap and easy way to diversify.
Seven Interesting Diversified Companies
1. Berkshire Hathaway (NYSE: BRK.B)
Warren Buffett’s empire is perhaps the most highly diversified business on Earth. Additionally, Berkshire Hathaway (NYSE: BRK.A) is one of the best growth stocks around.
Between 4 thQuarter 2005 and 3 rdQuarter 2019, Berkshire’s quarterly revenues grew from $25.368 billion to $64.972 billion. Plus, Berkshire Hathaway reported a $50.230 billion gross profit for the quarter ending on 30 September 2019. Impressively, Berkshire Hathaway had $128.2 billion in cash on hand on 30 September 2019, Business Insider reports.
Buffett accumulated that cash by running one of the most diversified companies on Earth. For instance, Berkshire’s subsidiaries include a batter maker (Duracell), insurance companies such as GEICO, realtors, car dealers, Jewelers (Ben Bridge and Helzberg Diamonds), a railroad (the BNSF), the Fruit of the Loom Companies, newspapers, the H.H. Brown Shoe Company, utilities (Berkshire Hathaway Energy Company), and Lubrizol.
The products Berkshire Hathaway sells range from Ginzu knifes; made by the Scott Fetzer companies, to furniture to liability insurance. Thus, no company is more diversified than Berkshire Hathaway.
Finally, Berkshire Hathaway owns vast amounts of stock in many companies. A sampling of Berkshire’s current stock holdings includes Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), American Airlines (NYSE:AAL), Costco Wholesale (NASDAQ: COST), and the BNY Mellon (NYSE: BK).
2. Apple Inc. (NASDAQ: AAPL)
Apple (NASDAQ: AAPL) is a diversified company because it makes money from several industries.
For example, Apple profits from entertainment through iTunes, the App Store, and Apple TV. Apple is a major player in software and apps through the App Store. Apple has a growing presence in finance through Apple Pay and Apple Cash. Apple even offers a credit card with Goldman Sachs (NYSE: GS).
Additionally, Apple manufactures a variety of devices including phones, watches, computers, tablets, and TV sets. Plus, Apple offers its own operating system iOS. Apple even produces movies and TV series. Additionally, Apple is researching new products such as the Apple Car.
Apple makes a lot of money from that diversification. For example, Apple reported a quarterly gross profit of $13.7 billion; or $3.03 a share on 30 September 2019. Importantly, Apple keeps a lot of that money. Apple reported $100.56 billion in cash and short-term investments on 30 September 2019.
Beyond that Apple is an incredible growth stock. Macrotrends estimates Apple’s market capitalization grew from $35.65 billion on 4 April 2005 to $1.271 trillion on 9 December 2019.
Finally, Apple paid a dividend of 77₵ on 7 November 2019. Moreover, Dividend.com credited Apple with six years of dividend growth, a 1.1% a share dividend yield, an annualized payout of $3.08, and a payout ratio of 25.9% on 30 December 2019. Hence, I consider Apple diversified, and many people think Apple is the best growth and income stock in the market.
3. Alphabet (NASDAQ: GOOGL)
The company formerly known as Google is incredibly diversified. Businesses Alphabet dabbles in include; telecoms through Google Fiber, healthcare through Verily and Calico, Venture Capital through Google Ventures, finance and private equity through CapitalG, artificial intelligence through Deep Mind, autonomous vehicles through Waymo, aerospace through Project Titan and Project Wing, and windmills through Makani, Business Insider reveals.
Some Alphabet products include phones; Pixel, computers; Chromebooks, and thermostats (Google Nest). Alphabet services include the Google search engine, Google Cloud, YouTube, Gmail, Google Maps, Google AdSense, Android, and the Machine Learning company; Chronicle. Hence, Google’s diversification rivals that of Berkshire Hathaway.
Alphabet reported a quarterly gross profit of $22.931 billion on 30 September 2019. That number was a 17.84% increase over the same period in 2018, Macrotrends estimates. Plus, Alphabet is a cash rich company it reported cash and short-term investments of $121.18 billion on 30 September 2019.
I think Alphabet offers investors a high margin of safety because of its incredible rate of growth. Astoundingly, Alphabet’s market capitalization grew from $103.99 billion on April 4, 2005, to $926.05 billion on 16 December 2019.
4. The Walt Disney Company (NYSE: DIS)
The magic kingdom is diversified because it owns theme parks, a cruise line, movie studios, TV networks, animation companies, a comic book publisher (Marvel), video streaming services, and more.
Notably, Disney owns four major movie studios, Disney, Lucasfilm, Marvel, and 21 stCentury Fox. It also owns a diversified portfolio of entertainment brands that include; Marvel, Star Wars, Buffy the Vampire Slayer, Planet of the Apes, Aliens, the Simpsons, Predator, and Pixar to name a few.
Moreover, Disney is now a major player in streaming with Disney+, ESPN+, and Hulu+. In fact, I think Disney could replace Netflix (NASDAQ: NFLX) as the dominant streaming service.
Disney’s diversification has paid off with a market cap that grew from $55.59 billion on 11 April 2005, to $243.23 billion on 16 December 2019. Beyond, growth Disney is a good income stock.
Impressively Disney (NYSE: DIS) paid a dividend of 88₵ on 13 December 2019, higher than Apple’s last dividend of 77₵. Overall, Disney shares offered investors a dividend yield of 1.2%, an annualized payout of $1.76, and a payout ratio of 30.5% on 30 December 2019.
5. Goldman Sachs (NYSE: GS)
I consider Goldman Sachs diversified because it companies an investment bank with consumer banking, technology research and development, and Fintech. Notably, Goldman Sachs is increasing its diversification.
For instance, Goldman Sachs spent $300 million to develop a credit card with Apple, Business Insider claims. Interestingly, Business Insider claims Goldman Sachs extended $10 billion credit to Apple credit card customers, as of 5 November 2019.
I consider Goldman Sachs a technology company, because CEO David Solomon claims Goldman Sachs employs 9,000 engineers, CNBC reports. Thus, engineers could make up 25% of Goldman Sachs’ workforce. Goldman Sachs offers consumer banking services including savings accounts and consumer loans through its artificial intelligence platform Marcus.
Goldman Sachs’ market cap grew from $53.18 billion on 7 March 2005 to $83.11 billion on 2 December 2019. Thus, Goldman Sachs is an okay growth stock.
However Goldman Sachs is a good income stock. Notably, Goldman Sachs paid a dividend of $1.25 on 29 November 2019. In total, Dividend.com estimates Goldman Sachs offered investors a dividend yield of 2.17%, an annualized payout of $5, and a 22.91% on 26 December 2019.
Goldman Sachs is a diversified dividend stock that offers a lot of income.
6. Citigroup (NYSE: C)
Citigroup is a diversified company because it offers consumer banking, investment banking, and credit cards.
For instance, Citigroup’s Global Consumer Bank claims to operate 2,140 branches. In addition, Citigroup claims it supported 86 million private-label and co-branded credit cards in 2018. Iconic brands that issue Citi Cards include; L.L. Bean, Caterpillar (NYSE: CAT), Shell, Best Buy (NYSE: BBB), ExxonMobil (NYSE: XOM), Macy’s (NYSE: M), and the Home Depot (NYSE: HD).
Finally, Citigroup is working on the Google checking account project they call Cache, Forbes claims. Thus, Citigroup is diversified and increasing its diversification.
However, Citigroup’s Market Cap shrank over the last 15 years. In fact, Citigroup’s market capitalization fell from $232.41 billion on 1 April 2005 to $174.36 billion on 16 December 2019.
Citigroup is a shrinking company that is trying to turn its growth around through diversification. However, I consider Citigroup an income stock because it offers a good dividend. Citigroup paid a dividend of 51₵ on 1 November 2019. Moreover, Citigroup’s dividend grew from 45₵ in May 2019 to 51₵ in August 2019.
Overall, each Citigroup share offered a dividend yield of 2.62%, an annualized payout of $2.04, and a payout ratio of 26.35% on 24 December 2019. Plus, Citigroup’s dividend has been growing for four years, Dividend.com estimates.
7. Amazon (NASDAQ: AMZN)
Amazon could be the king of diversification in today’s world. Jeff Bezos has assembled a collection of subsidiaries that rivals those of Alphabet and Berkshire Hathaway.
A sampling of Amazon’s empire includes; Whole Foods, Amazon Logistics, Amazon Web Services (AWS), Amazon Go, Amazon Books, Amazon 4-Star, Amazon Pop-up, Amazon Robotics (Kiva Systems), Amazon Prime, the PillPack online pharmacy, Ring, Zappos, Twitch Interactive, and Audible.
Bezos’s acquisition and diversification strategy has succeeded. For instance, Amazon’s market capitalization grew from $13.58 billion on 18 April 2005 to $884.32 billion on 16 December 2019. Hence, Amazon is the world’s best growth stock partially because of diversification.
In the final analysis, you do not have to buy mutual funds, or ETFs, to take advantage of diversification. In fact, you could diversify your portfolio with a few great stocks.
Originally published at https://marketmadhouse.com on December 30, 2019.