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3 Stocks to Build Your Portfolio Around

Reuben Gregg Brewer, George Budwell, and Brian Stoffel, The Motley Fool

You create a portfolio from the ground up, carefully selecting stocks one by one so that, together, they provide a balanced foundation on which your wealth can grow. To that end, these three Motley Fool contributors recommend technology giant Alphabet (NASDAQ: GOOG), (NASDAQ: GOOGL), drug leader Pfizer (NYSE: PFE), and diversified real estate owner W.P. Carey (NYSE: WPC) as the type of foundational stocks upon which you can build a portfolio. Take a little time to get to know them, and it's likely that at least one will find its way into your portfolio. 

Who knows what Google's second life might be?

Brian Stoffel (Alphabet): I have held shares of Alphabet -- formerly known as Google -- for longer than any of my other current holdings. Ten years from my first purchase, I still think it serves as a solid cornerstone for any investor.

A man in a suit stacking wooden blocks

Image source: Getty Images.

While it has lots of moving parts, it is essentially an advertising company. When you have eight different (mostly free) products with over 1 billion active users, you can collect more data than any other organization in history.

You can then use that data to offer targeted ads with more precision than anyone else. Such ad sales brought in $116 billion last year, or 85% of all revenue. With a dominating position in global search, this provides a solid and stable line of business.

But the icing on the cake -- and the reason I'd choose Alphabet over many other established businesses -- is the company's "other bets" segment. These are experiments trying to change the way we live by an order of magnitude. They include attempts at improving human longevity, connecting remote parts of the world to the internet, and cybersecurity initiatives. But the big one right now is Waymo, Alphabet's self-driving unit.

If and when any of the other bets become big hits, they will provide a surprising boost to your core holdings. Building that on top of the already-strong advertising business is what makes me believe Alphabet is a stock to build your portfolio around.

A tried and true cornerstone stock  

George Budwell (Pfizer): Pfizer is a name that rarely excites growth or income investors. The big pharma's top line, after all, has waxed and waned over the last decade thanks to a spate of patent expirations, combined with the launch of several new high-value drugs like the breast cancer medication Ibrance. And Pfizer's current dividend yield of 3.23% is only about average for a top drug manufacturer.

However, these less than eye-catching facts belie the drugmaker's true value proposition as a cornerstone stock. Over the last 10 years, Pfizer's shares have produced total returns on capital (including dividends and assuming a dividend reinvestment plan) of a staggering 313%. That healthy return on capital easily tops the performance of the broader markets during this period, illustrating Pfizer's power as a top value stock. 

What's the secret? It has quietly built one of the best clinical pipelines through a nice mix of organic development and several value-creating acquisitions. Underscoring this point, the drugmaker recently acquired Array BioPharma for around $11.4 billion, adding the potential blockbuster cancer treatment Braftovi/Mektovi to its oncology portfolio in the process. Pfizer, in kind, is forecast to become the world's largest prescription drug manufacturer by 2024, according to a recent report by EvaluatePharma. 

Best of all, Pfizer is in the midst of a radical makeover, highlighted by the merger and subsequent spin-off with GlaxoSmithKline's consumer healthcare business. This long-awaited move should help the drugmaker's innovative-medicines business shine brighter than ever. All told, Pfizer should have little trouble delivering top-notch returns for investors for the foreseeable future, making it an outstanding centerpiece for any portfolio.  

Diversified property exposure

Reuben Gregg Brewer (W.P. Carey): Every portfolio should have at least some exposure to physical assets, like rental property. There are a lot of ways to add real estate to your portfolio, but one of the most diversified options is W.P. Carey. This real estate investment trust (REIT) owns industrial, warehouse, office, and retail properties and gets around a third of its rents from foreign markets (mostly Europe). That level of diversification is rare in a REIT.

It is also worth noting that Carey is a net lease REIT. That means it owns properties, but the lessees are responsible for most of the operating costs of the buildings they occupy. It's a fairly low-risk approach to property ownership. 

Carey has been through some changes over the years, shifting from a partnership structure to a REIT and, more recently, working to close down an asset management operation. However, through it all Carey has proven that it is committed to rewarding shareholders with a steadily increasing dividend. (The streak of annual increases is up to 22 years at this point.) And with a funds from operations (FFO) payout ratio of around 80% based on current 2019 projections, it looks like that dividend is very secure.   

WPC Chart

WPC data by YCharts.

To be fair, the stock has rallied strongly along with the broader REIT sector. But if you are looking to build a portfolio that includes real estate, W.P. Carey is a name you should strongly consider. If you can be patient, a yield between 5.5% and 6% would be a solid entry point. But even if you choose to jump in today, the business you are buying is well worth the price of admission -- particularly if you are an income-focused investor looking for a reliable dividend payer.   

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Brian Stoffel owns shares of Alphabet (A shares) and Alphabet (C shares). George Budwell has no position in any of the stocks mentioned. Reuben Gregg Brewer owns shares of W. P. Carey. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.