The secret to building a successful stock portfolio is to populate it with a diverse range of stocks. Doing so increases the chances of having a healthy mix of growth and dividends. Growth stocks provide needed capital gains through steady share price appreciation while dividends act as a passive source of income to supplement your earned income.
To get this mix, you need to identify strong, well-managed companies that you would feel safe parking $50,000 in. Important attributes to look for include a reputable brand name; a track record of dividend increases; a business riding on a sustainable, long-term trend; and a management team armed with the right strategies and foresight to grow the business further. Such traits ensure that these stocks are good to own for years, if not decades, and can deliver financial rewards consistently.
The obvious challenge here is finding stocks that meet all these criteria. To help in your search, here are three stocks worth considering.
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1. Northrop Grumman
Northrop Grumman (NYSE: NOC) is a global aerospace and defense technology company with four core operating segments. The company designs, develops, and produces (1) military aircraft systems, (2) tactical weapons, (3) missile solutions, and (4) space and missile defense systems.
Northrop Grumman has an 8.5% market share in the aerospace and defense industry, according to CSIMarket, and is one of the major players along with Lockheed Martin (14.8% share) and RTX (15.1% share). The company saw sales rise from $35.7 billion in 2021 to $39.3 billion in 2023. Higher product expenses, however, crimped operating profit over this period, and net income was also affected by one-off items such as pension benefits.
The company's cash flows remained robust. The business generated an average annual free cash flow of $1.9 billion from 2021 to 2023. This consistent free cash flow generation allowed Northrop Grumman to increase its dividend annually for 21 consecutive years to an (annualized) level of $8.24 per share.
The first half of 2024 continues to build confidence in the business. Total sales increased by 8% year over year to $20.4 billion, while net income jumped 14% year over year to $1.9 billion. Free cash flow came in at $129 million, reversing the free cash outflow of $396 million a year ago.
The second quarter of 2024 saw the company clinch $15.1 billion of contracts, taking its order backlog to $83.1 billion, up from the prior year's $78.8 billion. Northrop Grumman also updated its revenue guidance for 2024 to range between $41 billion to $41.4 billion, up from a range of between $40.8 billion to $41.2 billion. Importantly, management expects the business to generate a free cash flow of between $2.25 billion to $2.65 billion.
Northrop Grumman reported a strong global defense budget outlook and believes it can continue to improve margins through digitally enabled efficiencies amid a shift toward fixed-price production and more international jobs. This consistent free cash flow generation, along with the company's strong business outlook and market position, should ensure Northrop Grumman can continue to raise its dividend for the foreseeable future.
2. Cloudflare
Cloudflare (NYSE: NET) is a cybersecurity company that runs a unified platform for cloud-native products to help organizations increase their workflow efficiency and accelerate business growth. The company helps to block billions of online threats to keep its customers' systems safe from malicious attacks.
Cloudflare reported increasing revenue and gross profit as more corporations digitalized and recognized the need for stronger cyber protection. Revenue went from $656.4 million in 2021 to $1.3 billion in 2023, with gross profit nearly doubling from $509.3 million to $989.7 million over this period. Cloudflare also hit a milestone when it turned free cash flow positive -- the cybersecurity firm churned out a positive free cash flow of $119.5 million for 2023, an encouraging reversal from the negative free cash flow generated in both 2021 and 2022.
The company's robust performance has carried on into the first half of 2024. Revenue jumped 30% year over year to $779.6 million, while gross profit climbed 33.7% year over year to $605.5 million. The good news is that free cash flow generation more than doubled year over year from $33.9 million to $73.9 million.
Cloudflare is also undertaking strategies to grow its presence and increase its breadth of services. The cybersecurity company acquired BastionZero back in May to strengthen remote access for its Cloudflare One platform, giving customers better control over servers and databases while increasing security and compliance for people accessing these systems. In the same month, Cloudflare also partnered with CrowdStrike to connect their platforms and enhance security to stop breaches. Other benefits include reducing costs and operational complexity for both companies' customers.
Cloudflare sees room for further growth, as the total addressable market for its developer, network, and trust services looks set to expand. Management estimates that this market stood at around $176 billion this year and will grow to $222 billion by 2027, driven by catalysts such as artificial intelligence (AI), 5G cellular network development, and the Internet of Things.
3. Datadog
Datadog (NASDAQ: DDOG) operates a monitoring and security platform for cloud applications. The software-as-a-service (SaaS) company offers a range of services such as infrastructure and application performance monitoring, along with cloud security for the customer's entire technology stack.
The explosion of AI has increased complexity for many organizations operating systems, and Datadog has expanded its product suite to include cloud service management. The company's services should see increased demand in the years to come as more organizations embrace AI and cloud systems.
Datadog has seen its revenue more than double from $1 billion in 2021 to $2.1 billion in 2023, with the business also churning out increasing free cash flow over the same period. Free cash flow went from $250.5 million in 2021 to $597.5 million in 2023. Datadog's customer base has also swelled from 18,800 to 27,300 over this period, with revenue per customer increasing year over year.
The company's financials continued to improve in the first half of 2024. Revenue climbed nearly 27% year over year to $1.26 billion, and the business generated an operating income of $24.6 million, reversing the $57 million operating loss in the previous year. Coupled with sharply higher interest income, Datadog generated a net income of $86.5 million versus a net loss of $28.1 million a year ago. Free cash flow also increased by 28% year over year to $330.5 million for the half year.
Datadog has been actively launching new features for its platform to expand its range of services and increase customer stickiness. Back in June, the company released Data Jobs Monitoring to help data teams and engineers detect job failures and optimize computing resources to save costs. In the same month, Datadog also introduced new additions to its security product portfolio to allow security teams to easily access their code, cloud environments, and production applications.
Management believes that the business has just a 5% market share with its current customer count of around 27,400 and that there are more than 530,000 global account opportunities to tap into. The cloud security total addressable market stands at around $21 billion in 2023 and is forecast to grow at 16% per annum through 2027.
These data points show that Datadog's business has significant growth potential that can be harnessed to increase both its top and bottom lines in the years to come.
Royston Yang has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare, CrowdStrike, and Datadog. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy .
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