Nine top starter stocks for beginning investors.
For many investors, consistently contributing to a low-cost index fund is the easiest and most assured path to long-term wealth. The stock market tends to be highly efficient and beating it over the long run is difficult for professional fund managers and retail investors alike. That being said, it’s not a bad idea for investors to supplement index funds with a few select stock picks. In particular, the stocks of large-cap blue-chip U.S. companies can be a good, relatively safe choice. Focusing on long-standing companies with strong balance sheets, ample cash flow and essential products and services offers a good margin of safety. As Warren Buffett put it: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Here are nine of the best stocks to buy for a starter stock portfolio.
Apple Inc. (ticker: AAPL)
With a market cap of $2.4 trillion, the company behind the iPhone, iPad, Mac and App Store has risen over the years to become the largest publicly traded company in the U.S. Founded by Steve Jobs, Steve Wozniak and Ron Wayne in 1976, Apple continues to smash revenue and earnings estimates, thanks to its constantly updated lineup of innovative products and services. The company is highly profitable, with a trailing 12-month operating margin of 31% and $25.7 billion of free cash flow as of March 2022. Through July 12, Apple is down 17.9% this year amid a rout in tech stocks. Apple’s current price might be a bargain given how solid its fundamentals remain despite the market downturn.
Under the leadership of Warren Buffett and Charlie Munger, Berkshire Hathaway has evolved into a global conglomerate, with diversified holdings in industries ranging from insurance, energy, utilities, rail, food, consumer products and financial services. Investors who buy shares of Berkshire essentially get the benefit of having their money professionally managed by the duo. During market downturns, Berkshire often deploys its massive cash reserves on buying sprees, snapping up stocks at bargain prices. Year to date, Berkshire is only down 7.3%, compared with the 19.9% loss suffered by the S&P 500. Buffett’s major buys this year include Occidental Petroleum Corp. (OXY), HP Inc. (HPQ), Citigroup Inc. (C) and Paramount Global (PARA).
Although best known for its Google search engine, Alphabet also controls a variety of other highly used products and services, including the Android smart phone OS, Google Chrome OS, Adwords & Adsense, the Google Play app store, and even hardware like Google Home, Pixel, Chromebook and Google Wifi. Although Apple might be the largest tech company by market cap, in terms of ubiquity and presence, Alphabet arguably wins. Recently, Alphabet beat analyst estimates for first-quarter 2022 earnings, with increases in sales, cash from operations and earnings per share. The tech giant also recently announced a 20-for-1 stock split, which will take place on July 15. This split will make Alphabet’s stock much more affordable to retail investors, given that both share classes trade above $2,000 a share right now.
Microsoft Corp. (MSFT)
Apple might have the smartphone market cornered with the iPhone, but when it comes to computer hardware, it continues to face stiff competition from Microsoft. With brands such as Windows, Office 365, Edge web browser, LinkedIn, Surface Pro, OneDrive, Xbox, Halo and Gears of War, the products and services offered by Microsoft are well known and in strong demand worldwide. Despite its stock being down 24.6% year to date, Microsoft continues to display strong fundamentals and good prospects for its core business. Recently, Microsoft started a shift to cloud computing as its core software despite its flagship Windows OS dominating the majority of the world’s desktop computers. The shift to cloud computing is expected to increase Microsoft’s revenues given its subscription-as-a-service model. In addition, Microsoft’s gaming division continues to grow, amplified by tail winds from the pandemic lockdown.
Intercontinental Exchange Inc. (ICE)
It is actually possible for investors to “buy a stock exchange,” as some exchange parent companies are publicly traded. A great example is Intercontinental Exchange, which operates global financial exchanges and clearing houses, and provides mortgage technology, data and listing services. ICE is best known for its ownership of the New York Stock Exchange, the world’s largest and most well-known stock exchange in terms of the market capitalization of its listed companies. NYSE’s long history, high daily trading volume and prominent role in the global financial markets give ICE a strong wide-moat advantage. This helps ICE maintain strong margins and growth, especially when it comes to the dividend, which has grown over the last five years to a current annual payout of $1.42 per share.
McDonald’s Corp. (MCD)
America’s most famous fast-food chain is an excellent long-term consumer cyclical stock worth holding forever. With over 36,000 corporate and franchise restaurants worldwide, McDonald’s has achieved an extremely strong network effect and economy of scale. Unlike other fast-food chains, McDonald’s has demonstrated an ability to adapt its menu over time and geographies, with additions like the McCafe lineup responsible for reinvigorating growth. This, along with modernization of its stores with new payment terminal technology and automation, has helped McDonald’s deliver strong shareholder value in the form of excellent operating margins and free cash flow, as well as earnings growth. As a stock, McDonald’s offers a combination of lower volatility compared to the market and a decent annual dividend of $5.43 per share, for a yield of 2.16%.
Costco Wholesale Corp. (COST)
Costco bucked the traditional retail model by offering low prices on a membership subscription model. For a small annual fee, customers can find just about anything at Costco warehouses, including groceries, health and beauty products, hardware, appliances, electronics, furniture, jewelry, furniture, tires and even gas. Oh, and don’t forget its $1.50 hot dog and drink combos which haven’t budged in price despite inflation. Even with the low price, Costco is renowned for its good customer service and high product quality, with brands like Kirkland becoming favorites with consumers. This winning combination has made Costco a very profitable company over the last decade, with rising sales in June 2022 augmented by skyrocketing food and gas prices. As of April 2022, Costco posted $1.35 billion in net income and delivered a great 31% return on equity.
Coca-Cola Co. (KO)
One of the longest tenured stocks in Warren Buffett’s portfolio is Coca-Cola, and for good reason. As one of America’s most-popular beverage companies, Coca-Cola offers more than 4,100 different beverages across 500 well-known brands such as Coca-Cola, Diet Coke, Coca-Cola Zero, Sprite, Fanta, Minute Maid and Powerade. Coca-Cola’s brand power and network effect aren’t just limited to domestic consumers though. Its products are also distributed and consumed widely internationally, with strong sales in Europe, the Middle East, Latin America, the Asia-Pacific and Africa, thanks to its 250 bottling companies, 900 production plants, 27 million retail outlets and 79,000 employees. Coca-Cola is a great low-volatility dividend stock, with a beta of just 0.7 and a yield of 2.74%. The company maintains a strong operating margin of 27.8% and generates a great return on equity of 45.6% as of March.
Verizon Communications Inc. (VZ)
The U.S. telecommunications sector is known for being highly oligopolistic, with a few select companies controlling the industry with few competitors. The largest and most well known of these companies is Verizon, which has solidified that competitive advantage with recent forays into cloud services and cybersecurity. Despite its large size, Verizon trades at an attractive price-to-earnings ratio of just 9.7, possibly indicating undervaluation, and boasts a strong return on equity of 27.6%. Like many telecom companies, Verizon also pays a strong dividend of $2.56 per share, for a yield of 5%. Recently, Verizon made a $97 million investment in its Texas network to meet growing demand, and also added 229,000 broadband internet subscribers in the first quarter.
9 of the best stocks for a starter stock portfolio:
— Apple Inc. (AAPL)
— Berkshire Hathaway Inc. (BRK.B, BRK.A)
— Alphabet Inc. (GOOG, GOOGL)
— Microsoft Corp. (MSFT)
— Intercontinental Exchange Inc. (ICE)
— McDonald’s Corp. (MCD)
— Costco Wholesale Corp. (COST)
— Coca-Cola Co. (KO)
— Verizon Communications Inc. (VZ)
More from U.S. News
Update 07/13/22: This story was published at an earlier date and has been updated with new information.