What About Core Stocks?

If you're more into stock investing, your core will probably focus on stable, blue-chip companies that provide a reliable foundation for your portfolio. As with funds, big and stable is the key to a core investment.

Great core stocks share a handful of qualities. For starters, they're profitable, consistently earning great returns on the money (or capital) shareholders have invested. The way we measure return on capital for companies is return on equity, or ROE. It's easy for a company to generate a large ROE in one year, though. Core holdings should be those that offer impressive ROEs year in and year out.

Core stocks should also be reliable growers. They may not be growing at the same pace that a new company is, but their earnings are predictable year in and year out. They may even pay out earnings to shareholders in the form of a dividend.

Finally, core companies are also financially healthy. In other words, they don't take on a lot of debt. Moreover, they generate gobs of free cash flow, or cash flow after spending.

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