Cisco Systems focuses strategy on long term

Networking giant Cisco Systems (Nasdaq: CSCO) is often considered a mature and low-growth tech company. However, its stock has outpaced the S&P 500 over the past year. In its last quarter, Cisco beat analysts’ estimates on both its top and bottom lines. Revenue rose 3.6 percent annually to $12.8 billion, while net income improved 6.2 percent to $3 billion.

There’s a lot more to like about Cisco. For starters, its product sales are improving, despite competitors offering cheaper wares. It has been making strategic deals to further its growth, such as buying cybersecurity companies Sourcefire, OpenDNS and Pawaa. With tens of billions in cash and equivalents in its coffers, it’s poised to make other smart buys.

Management is “very bullish” regarding Cisco’s security portfolio, which can help it transition to higher-margin offerings, with its CFO noting:

“In security this quarter, we saw the acceleration in the shift from hardware to software. Our customers are rapidly adopting our subscription-based and software offerings, which is helping us build a greater mix of recurring revenue. This transition is accelerating and will remain a focus for us going forward.”

Then there’s Cisco’s dividend, which has more than tripled over the past four years and which recently yielded 3.2 percent. Investors seeking both income and growth would do well to give Cisco Systems a closer look. (The Motley Fool has recommended Cisco.)

Ask the Fool

Q: What’s the best number of shares of a stock to own? – C.W., Somers, Wisconsin

A: Don’t think in terms of the number of shares. Think instead of their total value. You might have 500 shares of a $10 stock, worth $5,000, and 80 shares of a $200 stock, worth $16,000. Focus on the percentage of your portfolio that each stock represents. In this example, the 500 shares represent a much smaller chunk of your portfolio than the 80 shares.

Don’t let any holding grow too big. If one stock represents 50 percent of your entire portfolio, for example, that’s very risky. If it falls in value significantly, your portfolio will take a huge hit. If you hold many dozens of stocks, though, that’s not ideal, either. If a stock that represents just 1 percent of your portfolio doubles or triples, its overall effect will be small.

Most people might aim to hold between eight and 20 stocks, depending on their confidence. Park your money in only your best ideas. You want some diversification, but you don’t want to own more companies than you can easily keep up with.

If that seems like too much work, it’s a fine idea to consider index funds instead. Three inexpensive, broad-market ones are the SPDR S&P 500 ETF (SPY), Vanguard Total Stock Market ETF (VTI) and Vanguard Total World Stock ETF (VT). Learn more at fool.com/mutualfunds/ mutualfunds.htm and morningstar.com.

Q: How many mutual funds are there? – D.Y., McKean, Pennsylvania

A: According to the Investment Company Institute, at the end of 2014, there were 9,260 mutual funds in existence, making it easy to understand why some people get confused looking for good ones. (We offer some tips and insights at fool.com/mutualfunds/ mutualfunds.htm.)

My dumbest investment

I always like to say that my best trade ever was selling Enron at about $29 per share. Therefore, one of the worst was buying it at about $60. At the time, I was looking for exposure to energy, so I bought Exxon Mobil due to its sheer size and scope, and Enron because it was a creative innovator. Little did I know how creative!

When word first came out that Enron was conducting transactions with shell companies it had set up, details were sketchy, but I decided to sell. One mistake I managed to avoid at that time was continuing to buy more shares of Enron as the stock dropped from $60 to $50 to $40 to … well, you know.

For once I heeded the Paul Tudor Jones saying: “Losers average losers.” Instead of saying, “If I liked it at $60, I must love it at $40,” I asked myself, “If I liked it at $60, and now it’s at $40, what did I overlook?” As familiar as I am with that principle, I have had to learn it the hard way too many times. – D.J., Stamford, Connecticut

The Fool responds: That saying is meant to counter the strategy of “averaging down,” where one buys more of a falling stock, thinking it’s more of a bargain. Enron was indeed a criminal disaster, and you were wise to get out when you did.