The stock market can be volatile, this is why every savvy investor will tell you that it is essential to have an anchor stock in your investment portfolio. But if you’re new to the stock market and investing in general, you may not know what an anchor stock is or why you need it. Today, we will summarize and provide examples of anchor stocks that may be a fit for your portfolio.
What is an anchor stock?
Every investment portfolio should have a diverse range of stocks spread out across different companies and different industries. This helps to reduce your risk and protects you from losing your shirt if any of your stocks crash for any reason. Your anchor stock is the stock you can build your entire portfolio around, and it has a few key characteristics:
- It’s a stock that you know and may understand better than any other company.
- It’s a stock that you are not keen to sell and that you could continually top up as your investment portfolio grows.
- It’s may be known as a large or mega-cap stock. This means that its stock price has stayed relatively stable over a long period, and it will literally “anchor” your portfolio (or keep it afloat).
- It’s a stock that already pays strong dividends or has the potential to do so within a short period.
- It could be the stock that makes up the largest portion of your portfolio.
Why do I need an anchor stock?
Even high-risk tolerance investors who tend to purposely search out the most volatile stocks on the market generally need to have an anchor stock to secure their portfolio. While the possible payout of a high-risk, high-reward stock is hard to resist, they may always get a smaller payout of an anchor stock when a gamble doesn’t payoff.
Your anchor stock is the core of your portfolio, and any investment in growth stocks can be matched by investment in your anchor stock. An important thing to note is that you don’t have to invest in just one anchor stock. You can spread your risk even further by choosing two anchor stocks as the core of your investment portfolio.
Examples of anchor stocks
When determining the best anchor stock for your portfolio, there are a few questions you should ask before you start investing.
- Does the stock pay a dividend?
- Has that dividend increased over time? Measure this over a minimum five-year period.
- Does the stock have a price-to-earnings value (P/E value) of 18 or less?
- Is the current dividend yield larger than 2%?
- Is there a history of buybacks with the stock in question?
A few examples of stocks that may meet these criteria include Coca-Cola, Home Depot, Procter & Gamble, Berkshire Hathaway, Apple, and Alphabet (formerly Google).
But the whole point with an anchor stock is that the more boring it is, the better it is! With the safety net of a strong anchor stock securing your portfolio, you balance the risk of investing in more volatile growth stocks.
Learn more about investing with Delta Capital Management.