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The stock market has a tendency to intimidate would-be investors. However, we at The Motley Fool believe that with a little patience and the right stocks, almost anyone can succeed in the stock market. The trick is finding the best stocks for your investing style, and letting the value of those investments appreciate over time.
Consumer goods stocks offer a great starting point for beginners because of their easy-to-understand business models. I've included two food stocks below, each with an attractive risk-reward balance for the novice investor.
Before we dive into specific stocks, new investors with less starting capital should first take advantage of online discount brokerage companies, such as TD AMERITRADE. In addition to affordable online stock trading, AMERITRADE also offers free in-depth courses and educational resources for beginning to intermediate-level investors.
Of course, AMERITRADE is one of many brokerage companies available to you. Fortunately, the Fool's brokerage comparison tool can help you find the best fit for your investing needs. Now let's look at some stock selections that are well suited to stock-market newbies.
Why invest in stocks?
Historically, stocks have provided the highest returns of all other investments over the long term. Still, not all stocks are created equal.
Take Noodles & Company (NASDAQ: NDLS ) , for example. The fast-casual dining chain hit the public market running last month, with the stock's IPO more than doubling in value. This enthusiasm from investors seems promising until you consider that the stock now trades at nearly 430 times earnings. Yikes.
For comparison, the S&P 500 currently commands a price-to-earnings ratio of 19. The excessive run-up in Noodles & Company's stock coupled with the fact that it is new to the public market make it a far riskier bet than rival fast-casual stocks such as McDonald's (NYSE: MCD ) . Not only is Mickey D's a well-established company with a proven track record of positive earnings, but it's also a "blue chip," which is considered one of the best stock categories for new investors.
Blue chips are large-cap companies with stable profits and reliable growth. Together, these factors help minimize the long-term risk in stocks like McDonald's. Less risk can be a beginner's best friend.
Another factor that makes McDonald's stock less risky for investors is the fact that roughly 81% of its restaurants are franchised. This type of business model is a positive for shareholders because instead of spending capital on its restaurants, McDonald's owns the land each franchise sits on and collects rent payments and royalties from those franchisees.
This creates a steady stream of income for McDonald's. In fact, this rent and royalty income is one of the reasons McDonald's has been able to pay its shareholders a dividend every year since 1976. Today McDonald's stock boasts a dividend yield of more than 3%. Moreover, as McDonald's is the world's largest restaurant company by revenue, even the most cautious investors can rest assured that it will be in business for many more years to come.
Take a straightforward approach
Some of the best stocks available today are those with recognizable brands. Think PepsiCo (NYSE: PEP ) , Coca-Cola, or, yes, McDonald's. While more in-depth research is important, choosing companies you know with business models that you understand is a great starting point for new investors. This seems obvious, perhaps too easy, but take a closer look at a stock such as Pepsi and it's clear why this is a smart long-term investment.
Unlike its rival pop star Coca-Cola, Pepsi doesn't rely on beverage sales alone. Pepsi is the largest snack-food company by market share in the world today: Pepsi's Frito-Lay business brings in an estimated $13 billion each year. Additionally, Pepsi's stock is one of the S&P 500's dividend aristocrats -- yet another reason the stock is a great fit for new investors. The Dividend Aristocrats Index includes S&P 500 companies that have consecutively increased their dividends for at least 25 years running.
This means new investors don't need to worry that Pepsi might cut its dividend anytime soon -- particularly since the soda and snack giant has been paying a dividend since 1965. Today, Pepsi's stock trades around $83 a share and boasts a dividend yield of 2.6%. With strong brands and consistent earnings, both Pepsi's and McDonald's stocks should continue to reward investors over the long haul.
For patient investors there is no shortage of opportunity in the stock market today. Continually learning how to be a better investor is key, not only for beginners, but for seasoned investors as well.
To help you start making money in the stock market, the Motley Fool's chief investment officer has selected his No. 1 stock for this year. Now you can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.