Our 20s can be a pretty transformational time in our lives. Chances are, if you're in your 20s now, you're just getting started in the world of investing. Taking that first step into an unfamiliar world might sound scary, but you have an advantage everyone else in the market envies: time.
To help you take that first step and make some of your first stock purchases, we asked three of our contributors to highlight one company they think young investors should consider. Here's what they had to say.
Evan Niu, CFA
Video gaming is particularly popular for people in their 20s, and the good news is, there are some good stocks among video game companies. That's despite the fact that it's a cutthroat industry where fortunes shift quickly. A common investing adage is to invest in a simple business that you understand and can illustrate on paper. Extra points if you can relate to it also. At the same time, the video game industry is maturing in a lot of ways, so you really want to find a company within it that knows what it's doing and that you don't need to babysit in your portfolio.
Activision Blizzard (ATVI 0.22%) is one of those companies. Once upon a time, World of Warcraft was its primary cash cow, but Activision has done a good job of diversifying its business, reducing the risk associated with the aging franchise as subscriber numbers continue to trend lower.
Activision is also growing its digital and subscription revenues in a big way: They now comprise nearly half of the business (48% of revenue last year, up from 37% in 2014). Its operating margins -- a measure of how efficient a business is -- also crush those of the rest of the industry. Activision enjoyed an operating margin of 28% last year, compared to the 9% the rest of the sector endures.
The company also just closed its acquisition of King Digital, maker of the addictive Candy Crush Saga, as Activision continues to expand into mobile. All the while, Activision even pays a dividend, albeit a modest one yielding just 0.8%.
Investors with a decades-long time horizon should be focused on finding companies that are in high-growth mode with a massive addressable market ahead of them. One company that fits that description perfectly is TripAdvisor (TRIP 4.63%), the global leader in online travel reviews.
TripAdvisor has become the first site that millions of consumers visit when they're looking to plan and book their next trip. The company owns the largest library of travel review content in the world -- it currently has more than 320 million reviews on 6.2 million unique businesses worldwide. That huge content base gives its site an advantage over rivals, as consumers are often interested in reading fellow travelers' opinions before they make a purchase. Millions of readers have come to trust the company to deliver unbiased reviews so they can make an informed decision.
With so many eyeballs on its site, TripAdvisor is turning into a financial powerhouse. In 2015, the company generated nearly $1.5 billion in revenue, which it has grown at a 25% annualized rate over the past five years. That number should continue to push higher in the future as it continues to roll out out its "Instant Booking" feature, which allows visitors to book their vacation without leaving the TripAdvisor site. That should allow the company to capture even more revenue from visitors.
However, my favorite reason to invest in TripAdvisor is that its market opportunity is just so massive. Total worldwide spending on travel is a $1.3 trillion market, so thus far, TripAdvisor has only grabbed about 0.1% of the total pie. That gives the company a huge amount of room to grow over the coming years.
And yet, despite the company's leadership position and massive untapped growth opportunity, Wall Street has been selling off TripAdvisor's stock recently. Shares are down about 25% year to date, and they're trading for about 31 times their full-year profit estimates. I think that's a bargain price for a high-quality growth company like TripAdvisor, so I think right now is a great time for investors with a long-term time horizon to stash a few shares in their portfolio.
One thing "traditional" investment theories will tell you is that when you're young, you should shoot for the moon by investing in growth stocks. After all, if they don't pan out, you have plenty of time to correct any mistakes.
Personally, I think that overlooks another way to really build wealth over that long time horizon: reinvested dividends. Companies that can continually churn out dividends year-in, year-out make amazing investments for younger investors because each quarter, you're buying more shares with that dividend. Just look at the difference in stock price growth and total return growth (share price plus reinvested dividends) over the past 40 years for Johnson & Johnson (JNJ 0.07%), Procter & Gamble (PG 0.28%), and ExxonMobil (XOM 0.80%).
Johnson & Johnson, Proctor & Gamble, and ExxonMobil are the investment equivalents of the tortoise in the "tortoise and the hare" story. Slowly and steadily, their consistent dividend payments have generated wealth for their investors over long time horizons. All it takes as an investor is to have the patience to buy and hold these kinds of companies through good times and bad.
There's nothing wrong with following the traditional investment approach of buying high-flying growth stocks at a younger age. However, don't overlook the power of buying top-flight dividend stocks and holding them over the long term, since they can be just as effective at helping you reach your financial goals.