Nine top starter stocks for beginning investors.
For most new investors, exchange-traded funds that simply track one of the major stock market indexes make a lot of sense. These ETFs are passively managed, boast low management fees and often outperform even professional active investors. But investing in individual stocks can be a lot more fun and instructive. If you’re wondering what the best stocks for beginners are, looking at financially sound, consumer-facing blue-chip companies often makes a lot of sense — these names aren’t merely proven entities, but they’re also generally easy to understand, and owning them forces you to track their businesses, valuation metrics and performance, tools that will serve you well in your investing life. Here are nine of the best stocks to buy for a starter stock portfolio.
Apple Inc. (ticker: AAPL)
What better starter stock is there than Apple, the pervasive Big Tech giant worth about $3 trillion? As the most richly valued company in the U.S., the iPhone maker has leveraged its unique combination of high-quality hardware and software in a way no other consumer electronics company has, creating a “walled garden” in which Apple totally controls the customer experience. Not only are its products and services easy to understand — think the iPhone, Mac, iPad, Apple Watch, App Store, iCloud and iTunes — but many investors are likely already loyal Apple customers. Why shouldn’t your expenses go toward buoying a stock you own? As an added bonus, Apple is far and away the largest holding of Warren Buffett’s Berkshire Hathaway (BRK.B, BRK.A), lending it even more credibility from the greatest investor of all time.
Visa Inc. (V)
Next among the best stocks for beginners is credit card giant Visa, the most valuable publicly traded credit services company, worth about $470 billion. As with Apple, it’s a business with global reach — it operates in more than 200 countries and territories and has 3.6 billion cards outstanding — and it’s fairly easy to understand. Whether online or in person, every time Visa’s cards are used, Visa takes a cut of that transaction. With the modern economy increasingly shifting to a cashless society, this is a low-risk business with long-term growth prospects that continue to look good. On top of that, Visa trades at a discount to its most direct competitor, Mastercard Inc. (MA), trading for less than 26 times forward earnings, compared with Mastercard’s forward price-earnings ratio of 35.
Verizon Communications Inc. (VZ)
If you tend to be more risk-averse than the average person, telecom giant Verizon should be considered one of the best starter stocks around. The country’s most valuable wireless carrier, Verizon is a dominant $220 billion company in the oligopolistic telecom industry, paying an impressive 4.7% dividend, the highest on this list. Verizon is unlikely to yield the capital gains other starter stocks do, but its predictable cash flows, high dividend, modest P-E ratio of 10 and high barriers to entry make it an attractive pick for conservative and income-focused investors. The ongoing rollout of 5G networks should also be a medium-term driver for shares, as the company sells more 5G-enabled devices and upgraded data plans.
Target Corp. (TGT)
Sure, Amazon.com Inc. (AMZN) may be considered the sexiest retail stock. And Walmart Inc. (WMT) is the king of brick-and-mortar retail. Lost in the shuffle by many investors is Target, which is the underappreciated but perfectly serviceable third wheel in U.S. retail. In 2017, Target boldly initiated a multibillion-dollar investment plan to beef up its e-commerce capabilities, a wager that paid off tremendously. Shares, even after a recent pullback, have rallied from less than $50 in 2017 to roughly $230 today, largely driven by improvements in e-commerce operations that paid off in spades when the pandemic forced consumers to change their behavior. At the same time, Target still reaps major rewards from its roots as a physical retailer: E-commerce still accounts for just 13% of total U.S. retail sales.
Outside of Apple, Google parent Alphabet is the only other trillion-dollar company on this list, worth about $1.9 trillion. The search engine giant, along with Meta Platforms Inc. (FB), dominates the digital advertising market, and Google accounts for about 29% of every dollar spent on online advertising. Google’s so-called competitive moat in the search market is so strong that it’s been the dominant global search engine for more than a decade. Shareholders arguably have no real long-term issues to sweat until competitors start taking meaningful search market share. Especially given the fact that Google and Apple — which Google pays to be featured as the default search engine on its devices — form a near-duopoly in smartphone operating systems, don’t hold your breath for Google to be usurped in search. As a bonus, Alphabet has a lower P-E ratio than Apple despite analysts expecting higher earnings growth over the next five years.
AutoZone Inc. (AZO)
Next on the list of the best stocks to buy for a starter portfolio is auto parts retailer AutoZone. Another solid, simple business, AZO is primed to benefit from the global supply chain shortages that have driven costs of new and used cars to skyrocket. This is forcing consumers to keep their clunkers; the average age of a car on U.S. roads rose to 12.1 years in 2021, up from 11.9 years in 2020 and up 26% from 2002’s average age of 9.6 years. As consumers fix up their old vehicles, AutoZone’s business is thriving, with sales up 16% last quarter and earnings per share up 38%. AZO stock is up 60% in the last year but is still cheap by traditional valuation metrics, trading for less than 20 times earnings. That said, AZO isn’t cheap on a nominal basis, with the stock trading for more than $2,000 per share. Thankfully, fractional-share investing should still make this stock accessible to new investors.
Johnson & Johnson (JNJ)
A longstanding blue-chip stock and component of the Dow Jones Industrial Average, Johnson & Johnson is a diversified health care giant and one of the steadiest companies in corporate America. When first building a stock portfolio, starting with tried-and-true names is a good way to not get disillusioned, and JNJ’s financial strength is such that it’s raised its dividend payment annually for about 60 years, one of the longest streaks in the S&P 500. The stock yields 2.4% at present. Sales are roughly evenly split between U.S. and international markets, and the company has market-leading products in all three business segments: consumer health, pharmaceuticals and medical devices. Notably, JNJ announced plans in November to spin off its consumer health division within 18 to 24 months. Consumer health is both the smallest and slowest-growing segment of JNJ, accounting for just 15.9% of sales and growing 5.3% last quarter. The pharmaceuticals and medical devices divisions grew at 13.8% and 8%, respectively.
FedEx Corp. (FDX)
The growth of e-commerce isn’t just good news for digitally equipped retailers. It’s also a boon to the entire shipping, freight and logistics industry. Enter FedEx, the global delivery giant that plays second fiddle to United Parcel Service Inc. (UPS). Sometimes not being the alpha dog can cause investors to overlook a company, and in this case that’s resulted in an unjustified valuation gulf between the $70 billion FedEx, which trades for 15 times trailing-twelve-months earnings, and the $188 billion UPS, which goes for 30 times earnings. The shipping industry is in secular growth mode with the ongoing pandemic and the continued expansion of e-commerce. Another thing that makes FedEx one of the best stocks for beginners is its excellent management: Last quarter, the company managed to boost operating income by 9% despite serious labor shortages, global supply chain woes and rising costs.
Bank of America Corp. (BAC)
Last but not least is Bank of America, the second-largest publicly traded U.S. bank, with a valuation of nearly $400 billion. Rising interest rates are one of the major expected themes of financial markets in 2022, and banks are traditionally big beneficiaries of rising-rate environments, as the spread between what they pay for deposits and what they charge for loans grows. Plus, as a sprawling national bank, BAC benefits from improving macroeconomic conditions like the booming housing market, tight labor market and generally improving financial situation of the U.S. consumer. The company’s net charge-off ratio, a metric measuring extended credit that’s defaulted, is near 50-year lows at 0.2%. With a 1.7% dividend, a P-E ratio around 15 and a lack of major visible headwinds, BAC is another great addition to any beginner’s stock portfolio.
Nine best stocks for a starter portfolio:
— Apple Inc. (AAPL)
— Visa Inc. (V)
— Verizon Communications Inc. (VZ)
— Target Corp. (TGT)
— Alphabet Inc. (GOOG, GOOGL)
— AutoZone Inc. (AZO)
— Johnson & Johnson (JNJ)
— FedEx Corp. (FDX)
— Bank of America Corp. (BAC)
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