If you’d invested $143 in the S&P 500 in 1928, reinvesting all dividends, at the end of 2019, your initial investment would be worth $502,417, according to Aswath Damodaran, Professor of Finance at New York University Stern School of Business. That simple pick for beginning investors equates to an average 9.2% annual return.
But as any investor knows, hidden within the average are losing years, as well as years with extremely high returns.
If you’re a beginning investor looking to dip your toe into the stock market, there are a few things to do before choosing your first stock.
Make sure that you:
- Have an emergency cash fund of at least three to six months of expenses.
- Have paid off most of your credit card debt.
- Plan to invest for the long term, not for a quick profit.
Investing in the stock market is a long-term endeavor. Those who steadily trade in and out of the markets tend to earn lower returns than the buy-and-hold investors. With that being the case, beginning investors will do well to consider boring stocks they can have for the long term.
Characteristics of a Good Stock to Pick
Picking individual stocks requires research and an understanding of the company. After all, you’re buying shares so you can participate in the future growth of that firm.
When investing in stocks, it’s wise to look in your own backyard. Peter Lynch, famous fund manager of Fidelity Magellan, recommends buying what you know. For example, if you work in technology, then you might consider investing in a tech stock. If you’re knowledgeable about science, look into that area.
Consider stocks that have years of strong growth as well as a plan to continue growing.
Avoid investing in firms with excessive amounts of debt.
Buy fairly or undervalued stocks to increase your chances for capital appreciation. Check out the company’s price-earnings ratio and other valuation measures, to make sure that you’re not overpaying for the company. The P/E ratio measures the price you’re paying for one dollar of earnings.
Seek out companies with a strong competitive advantage and avoid commodity products. Warren Buffett coined the phrase, economic moat, which refers to companies that are tough to replicate and have a unique advantage.
If you haven’t opened up an account yet, you might consider the Robinhood or M1 Finance apps with free trading. M1 even offers free investment management. Of course, the big brokerages like Morgan Stanley’s (NYSE:MS) eTrade, Schwab (NYSE:SCHW) and Fidelity also offer commission-free trading.
Broadly, these three stocks for beginners are a good place to start:
Stocks for Beginners: Snap-On (SNA)
Snap-on manufactures tools, equipment, diagnostics and solutions for repairing vehicles, planes and other types of industrial equipment. The company has a $7.4 billion market capitalization and a 3.2% dividend yield. Trading at $137, the stock is reasonably valued now, with a trailing P/E ratio of 11.7 — near the bottom of its historical ratio range.
The recent pullback in consumer activity due to the novel coronavirus has hurt Snap-On as customers purchased fewer premium tools and driving declined. Yet, the low valuation makes this a good entry point for the stock, which is likely to rebound along with improvements in the U.S. and global economies. The high dividend provides cash flow for beginning investors, as well. Ultimately, increasing vehicle complexity bodes well for the future of Snap-On’s product line.
Additional revenue from their financing arm should help the bottom line in the future as well.
AT & T (T)
This global communications company has been evolving for generations and the DirecTV and Time Warner acquisitions add to the company’s value. AT & T provides telecommunication, media, and technology services across the globe. With increasing dividends for 34 years, beginning investors will enjoy cash flow along with potential capital appreciation.
At around $32, T stock’s current P/E ratio is 15.2 and the yield is a mouth-watering 6.8%. And, the price is on the lower end of its five-year trading range giving support to the thesis that the firm is reasonably valued. Even if the price stagnates for a while, the high yield is tough to beat.
AT & T wireless grew by 163,000 net postpaid phone customers this quarter, doubling new users this quarter over a year ago. With the upcoming rollout of 5G technology, AT & T can expect continued growth going forward. On the negative, side, the faltering economy hit equipment sales and WarnerMedia with the decline of television sports coverage.
With 5G growth initiatives and a rebounding economy, beginning investors can enjoy the dividend while waiting for the economy to turn around.
This biopharmaceutical company develops and markets pharmaceuticals in the U.S. and globally. Known for Humira, a biologic drug for autoimmune and intestinal diseases, AbbVie also offers drugs to treat arthritis, leukemia, and other diseases.
ABBV has a P/E ratio of 16.3 and a 5.2% dividend at the current price of $90.71.
The company has a pipeline of new drugs, including cancer treatments, to offset any losses due to patent expirations. The company’s recent acquisition of Allergan will boost the firms cash flow as well.
Drug companies are typically less impacted by economic difficulties and patients need their medicine during good times and bad, making this a solid pick for beginning investors.
You’ll notice that these three stocks are from diverse industries. When you own individual stocks, it’s important to diversify across industries so that if one industry falters, you’ll have others doing well to prop up total returns.
If you’re avoiding funds it’s usually a good idea to own roughly 10 individual stocks from distinct sectors to improve diversification.
Finally, blue chip stocks are solid picks for beginning investors.
Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor Pros.com, a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com. Follow her on twitter @barbfriedberg and @roboadvisorpros. As of this writing, she did not hold a position in any of the aforementioned securities.