When developing an investment portfolio, there are many types of assets to choose from, including Fortune 500 company stocks. These stocks are issued by companies found on the annual Fortune 500 list, a ranking of the largest and most profitable public and private American companies.
Fortune 500 stocks should not be confused with the S&P 500, which is an index that includes just publicly traded companies. There are many reasons to invest in a Fortune 500 stock, including the fact that they are some of the leading companies in the country and have historically outperformed the S&P 500 by about 0.5 percentage points each year.
What is a Fortune 500 company?
The annual Fortune 500 list published by Fortune is a ranking based on a company’s total revenue. The list is made up of many companies that are household names, such as Walmart, Amazon, Apple, and CVS Health. But there are also lesser-known companies in the mix as well such as drug distribution giants McKesson and AmerisourceBergen.
“Fortune 500 companies span various industries such as technology, healthcare, retail, and more, providing a nice level of sector diversification,” says Clay Gardner, co-CEO and co-founder of the investment platform, Titan.
While the companies on the Fortune 500 list represent many different sectors, they all share a common feature, and that is being among the richest American corporations.
Is it a good idea to invest in Fortune 500 stocks?
So why might you want to include Fortune 500 company stocks in your portfolio? To begin with, investing in a Fortune 500 company follows one of the oldest and most traditional investment strategies used: invest in what you know.
This strategy boils down to investors buying stocks based on their own personal knowledge or familiarity with a company. By following this approach, you’re less likely to fail—at least according to the buy-what-you-know theory. And when it comes to Fortune 500 companies, many are companies that Americans rely upon daily and, therefore, should know quite well.
“For example, GE (General Electric) is a common household name,” says Jason Glisczynski, certified financial planner and co-founder and CEO of Silvertree, LLC, a private wealth management firm.
In addition to being high-profile, these companies typically offer a proven track record, and their stocks perform slightly better than those on the S&P 500.
“With 500 companies, it’s hard to make a blanket statement across the group,” says Gardner. “While they all generate impressive levels of revenue at an incredible scale, the underlying profitability and growth of revenue are two important inputs for a successful investment.”
3 steps to purchase Fortune 500 stock
The process of purchasing a Fortune 500 stock is straightforward and not all that unlike purchasing any other stock. This effort should always include ample research of the stocks or companies you’re considering, in conjunction with a review of your financial goals and how the stock may align with those goals. Another key step is finding an appropriate investment platform to purchase stocks and then funding your account.
1. Open an investment account
The best option will depend on your level of investing expertise, the amount of guidance you’d like, and the cash you have available to invest. A guided brokerage account, for instance, will include the expertise of an investing professional, while self-directed brokerage accounts do not. Robo-advisors offer something of a medium. Many provide a suggested portfolio or asset mix based on your financial needs and goals, which are gleaned from a questionnaire you’ll complete when opening the account.
“The first question you need to ask yourself and the choice you need to make is: Do you think you have the expertise to pick which of the Fortune 500 make good investments?” says Joe Percoco, co-founder and co-CEO of Titan. “If not, do you want a professional to do it for you? If you have the expertise, then you can open a direct investment account with the likes of Fidelity or Schwab. If you don’t have expertise—and most Americans fall into this bucket—then you can either invest in the whole basket of 500 via a low-cost ETF or give your money to an investment manager or financial advisor who will identify the best investments of the 500.”
2. Research and select investments
When purchasing any type of stock or investment, it’s important to take the time to thoroughly research the company. This should include reading about the company’s background and reviewing its financial profile.
“I wouldn’t add a Fortune 500 company to a portfolio just because it sells a lot of stuff or goods,” says Clark Kendall, president, and CEO of Kendall Capital, a wealth advisory and fee-only investment firm. “You want companies that have unique products and services that people want to pay a premium for. Coca-Cola has done this well in terms of selling sodas. They have the ability to charge a premium because they have a secret formula. In general, you want to own a company that has unique products and services.”
3. Fund your account and buy stocks
Once you’ve identified the investment platform that works best for your needs and identified the Fortune 500 stocks you’d like to buy, the next step is funding your account. It doesn’t take a great deal of money to get started—many roboadvisor platforms allow investors to open an account and buy stocks with as little as $10, while others start with a minimum of about $100. These same platforms often allow for buying fractional shares.
“Because of advancements in technology, the barrier to entry for buying publicly traded companies has been dramatically reduced,” says Glisczynski.
It’s also possible to acquire Fortune 500 stocks by purchasing shares of index funds and ETFs that include such companies among their asset mix.
5 index funds and ETFs that include Fortune 500 stocks
If you’re interested in adding Fortune 500 stocks to your portfolio, there are a variety of low-cost ETFs and index funds to consider. The options include:
- Vanguard S&P 500 Index Fund ETF (VOO): Trading at $366 per share, this Vanguard index fund provides exposure to S&P 500 Index assets, including Fortune 500 companies. Some of its Fortune 500 assets include Apple, Microsoft, Amazon, and Google.
- iShares Core S&P 500 ETF (IVV): iShares, which is currently trading at $400 per share, tracks an index made-up of large, established U.S. companies, including Fortune 500 companies. The major holdings include Apple, Microsoft, Amazon, Google, Johnson & Johnson, and Exxon Mobil.
- SPDR S&P 500 ETF Trust (SPY): This ETF includes such Fortune 500 companies as Apple, Microsoft and Amazon and is currently trading at $398 per share.
- Fidelity 500 Index Fund (FXAIX): Similar to the other funds on this list, Fidelity’s 500 Index Fund tracks the S&P 500 index. Fortune 500 companies among its holdings include Apple, Amazon, and Google. It is trading at $138 per share.
- Schwab S&P 500 Index Fund (SWPPX): This low-cost fund (currently $61 per share) invests in some of the most well-known U.S.-based companies on the S&P 500. Google, Johnson & Johnson, Microsoft, and Amazon are some of the Fortune 500 companies among its holdings.
How to track your investments
Once you’ve bought shares in a Fortune 500 company, you can track performance using the investment platform you selected to make the purchase. It’s a good idea to monitor the stock to keep abreast of whether it’s performing as you had hoped or expected.
“Signposts may include that sales continue to grow quickly, the company is winning market share in a geography, or that there is a strong cash flow generation to buyback shares,” says Percoco.
Over time, you may also consider selling some or all of your shares depending on your long-term investment goals, as well as how the stock evolves and the company performs. For instance, if the Fortune 500 company you invested in somehow loses its competitive edge, selling may be a wise move.
“If you bought Coca-Cola because they have a unique product and service and then they lose that competitive advantage for whatever they offer, you may want to sell. Or if Walmart starts doing the same delivery of packages as Amazon, it may be time to sell,” says Kendall.
Additionally, if your Fortune 500 stock purchase starts trading at exorbitant valuations, it may be time to sell or trim back your holdings in the company.
“When the stock becomes too large a percentage of your overall portfolio—such as more than 10% of your portfolio, you may want to consider selling as you don’t want the success or failure of your portfolio to be dictated by one stock,” says Kendall.
Fortune 500 companies are some of America’s wealthiest and most well-known companies. And for this reason, they can often be a valuable part of your investment strategy. However, when seeking to purchase a Fortune 500 stock, it’s still important to do your research and ensure that the company is a sound investment. If you’re uncertain about which Fortune 500 stocks may be the wisest buy, consult an investment professional.