Editor's note: The following transcript has been lightly edited.
LONDON -- This is the second part of a two-part transcript in which Fool.co.uk's David Kuo chats with intern and novice investor Ben Golland about what he learned in his two weeks at The Motley Fool. They chat about his perception of investing before his internship and how it has changed in a fortnight. Ben explains the different investing styles he learned and reveals his preference. He also picks out the 10 shares that he now intends to buy for his first portfolio.
David Kuo: OK, so let's put that to the test, then. If I had to ask you -- well, I am going to ask you to name 10 shares that you would be happy to put in your beginner's portfolio today. What would they be, and why have you chosen them?
Ben Golland: I'm going to lean toward the income side of things.
David: OK, if I laugh at any of them, it isn't that they're bad shares, OK? If I laugh, maybe it's because it's the same shares that I have in my portfolio.
Ben: OK, I'm going to start off with ...
David: So don't be put off, OK? Don't be put off if I giggle a lot.
Ben: I'd start off with Vodafone.
David: [laughs] I've got one of those.
Ben: But I have to say, whilst the yield's very good -- it's about 6.5% -- I'd almost be a bit hesitant with it, my reasons being that, over the past few years, and the forecast for the next few years, their dividend cover's going to drop by a lot.
David: Can you explain what dividend cover is?
Ben: So, dividend cover, you work out by dividing the dividend by the earnings per share, and what you can see is how much of the earnings are going to be given back to shareholders. So in 2011, it was 1.6; in 2012 it was much better, it was 1.9; but it's set to drop in 2014 to as low as 1.2, which could be an indicator that the dividend might be cut soon, it might be rebased. So they may get in, they may not, but they're very strong at the moment.
David: OK, so there's a slight question mark alongside Vodafone, but for now you're quite happy to name it as the first share that you might put into your Ben Golland portfolio?
David: OK, so Vodafone is No. 1. No. 2?
Ben: I'd say Sainsbury's
David: OK -- I'm not laughing now.
Ben: Yeah, I like them; they have a good yield of about 5.5%, and they've got great dividend cover of almost 2, and I think they're ... whilst a lot's been talked about Tesco at the moment, I maybe think it's, maybe it's just my mindset, and maybe they're a bit of a safer bet, because they're not in the limelight so much.
David: Do you have a personal preference as to where you go and do your shopping -- Sainsbury's or ...
Ben: Not really. In fact, I probably shop in Tesco more than I do in Sainsbury's, but from an investor's point of view, I think I like them more.
David: OK, excellent, so we've got Vodafone, Sainsbury's, and No. 3?
Ben: I think BP
David: It's spitting out loads of cash.
Ben: Yeah, it's a generator of cash, which is very nice, and as well, I think the important thing that I should point out now is that you want to keep your portfolio as balanced as possible, so you want to get a range across the sectors. So, so far, we've had telecoms, we've had oil, and food.
David: OK, so a lot of diversification.
David: OK, and let's have a look at No. 4.
Ben: British American Tobacco.
David: OK, are you a smoker?
Ben: I'm not at all, but I don't mind a sin share, I'm told they're called. Yeah, it's been paying out regularly for as long as anybody can remember, so I think that's a very good income share.
David: OK, so you don't have any moral hang-ups about investing in tobacco companies?
Ben: Not particularly, no.
David: OK, that's excellent. So what about No. 5, then?
Ben: BAE Systems
Ben: Yes. They have a really good yield; in fact, it's better than Vodafone -- it's 6.6%, and their dividend cover is above 2 and has been for a long time, so I think they're really strong, and they're one that I didn't really look at initially. They were a company that I didn't really know a lot about and hadn't really heard of, but after taking a look, I think they're really good.
David: Now, you see, as a top-down investor myself, BAE Systems would ring alarm bells, if somebody were to say that to me, because I'm very concerned about the cutbacks, the budget cutbacks in various countries on defense, and I might say that yes, BAE Systems is a great company, but if the governments start cutting back on what they spend on defense and armaments, how is that going to be affecting BAE Systems? But you seem quite relaxed about that?
Ben: Well, I think they recently signed a contract for something like 500 million pounds, or something like that; I can't remember the details, but I think they do have a contract that they've signed recently, and I don't know -- I think there's always going to be a need for that sort of company, so maybe it's more a longer-term thing.
David: Yeah, well I think you're right there. I think there will always be cross-border conflicts somewhere around the world, so therefore BAE Systems would not be a bad bet. OK, so No. 6?
Ben: No. 6 would be GSK [GlaxoSmithKline].
David: Right, OK -- why is that?
Ben: As a person who does biochemistry, and I'm not plugging them in any way, but I'm going to work for them next year; but I think out of the pharmaceutical companies, they're in a very good position. They've got a very good yield again of above 5%; their dividend cover isn't bad, either, as well. I think, well I can tell you, after being to a meeting there this morning, that they have a pipeline that ...
David: Is this insider information?
Ben: Well, it's everything -- you can find this out. It's well known, so I'm told, that we were told in the presentation that a few years ago, they only had seven products in their pipeline, whereas they're looking at more like 30 now. So in the future, I think they're in a very strong position in terms that the money that they're going to generate is just going to carry on increasing.
David: OK, very good, so the next one?
Ben: The next one I'd go with, I'm going to drop down to the 250. I've been hanging around in the FTSE 100 so far. I'm going to go with Britvic
David: And what is the dividend yield?
Ben: The dividend yield is 5.2%, and again they're one with an excellent dividend cover, generally above 2, so I like them. Again, we're going to stick in the 250, and I'm going to go with Balfour Beatty, the construction company, again above 5% dividend yield, and their cover's even better -- closer to 3. I was quite surprised, because I wasn't aware that -- well, I didn't think that a company would be giving out such a good yield, and would have such good cover, even though it was in the 250, but I was pointed in that direction, and yeah, it proved --
David: And you were pleasantly surprised?
Ben: Pleasantly surprised.
David: OK, I can't wait for the last two now, because we've done eight.
Ben: The last two, I'm going to go with Investec -- again, great dividend yield, 4.8%, but their dividend cover on average is 2.3; and the last one, which I'm going to stray away from income now, because that's where I've been leaning towards, and I'm going to go with a value share, and I'm going to say AXA, the insurance company.
David: Wow, OK -- and why have you chosen that?
Ben: Well, I think [Fool U.K.'s] Stephen Bland, who's been plugging Aviva
David: Don't get on the wrong side of Stephen!
Ben: I've never even met the man, so I don't want to say anything bad!
David: Don't get on the wrong side of Stephen Bland.
Ben: And he's got a better track record than me.
David: You haven't got a track record!
David: Everybody's got a better track record than you. OK, so those are nine very interesting income shares, and that final one, the value share. Why have you chosen one value share to put in your portfolio?
Ben: I think I could easily have chosen another income share, but I like the idea of doing something different as well. I think I've got to make sure I dip my toe in all three different types that we've looked at, because whilst I'm comfortable with income investing now, it's more out of the three, I may find that actually I'm better or I'm more comfortable with value in the future, or possibly growth. So I'd like to keep an eye on all types.
David: OK, I'll tell you what I'll do for you, Ben -- since you've actually sort of gone all the way to give me these 10 shares, when the podcast goes up, I will be posting these 10 shares on our podcast page, and what I will also be doing is to put the share price alongside each one of them, so that we can have a look, but hopefully you'll be able to come back in about a year's time, come back and we'll have a look to see how these shares have done. I don't think it's a shabby collection of shares.
Ben: I'd be quite interested to see how it's going to turn out.
David: So would I -- I will be quite interested to see how they perform over time. Now, one question I do want to ask you is, when you were doing your income-investing part of the internship, we also told you how to calculate intrinsic values of companies. So what have you actually learned, with regard to, let's say, Vodafone? Vodafone shares currently are around 1.80 [pounds] a share, and do you have an intrinsic value in your mind of your calculations for Vodafone? It is yielding 7% -- what would happen if the shares were to fall from 1.80 to 1.60 or 1.50? How would that affect the way that you look at Vodafone, and you look at Vodafone in relation to your portfolio?
Ben: I think if it's a share that I'm considering buying now, I think if anything, if the share price dropped, it would be an indicator that I would want to buy more of them, because I think they're in a strong position already, so the share price is a window of opportunity.
David: That is an interesting learning point from the perspective of somebody who has only experienced investing in two weeks -- the fact that if a share price falls, it represents better value than if the share price were to rise. As an income investor, you ideally want the share price to fall, so that when your dividends are generated, you want to buy more of them?
Ben: Yeah, exactly.
David: So isn't that a very bizarre concept?
Ben: Yeah, it's not something that I would have really been able to think about as clearly as I do now, but I think it's a good point to be made that, depending on your investment style, you'll want to look at those numbers, to look at the different ratios, to look at the share price, in a particular way. So as an income investor, yeah -- you'd want the share price to possibly fall, because it gives you a better chance to buy shares that are a better value.
David: And that is something that we try and explain to people, that if you are a long-term investor, you want the share price to fall, because you want to be able to buy more and more of it. That is precisely what Warren Buffett has always said -- the long-term investor wants low share prices, not high share prices.
Ben: Yeah, because as long as the company still sells what it's selling, as long as people are still buying what it's selling, then it's going to keep on making money; it's going to keep on being able to pay you, the shareholder.
David: That's wonderful -- it's what I call being able to buy a Ferrari for the price of a Volkswagen, so then next time you see a Ferrari out there, just pray that it's about the same price as a Volkswagen -- it isn't. OK, well thank you ever so much for coming in today, Ben.
Ben: Thank you very much for having me.
David: Well, that was very enjoyable. Now, I have just one more chore to perform before we end today's podcast, and that is to find a quote that sums up today's podcast. The quote comes from Oliver Wendell Holmes, and Oliver Wendell Holmes said, "Man's mind, once stretched by a new idea, never regains its original dimensions," and I think we've been able to stretch your mind over these two weeks, and Ben, it will never return to its original dimensions ever again.
Ben: I hope not, I hope not.
David: You will never be able to look at investing as a casino ever again, because you will just see investing as an opportunity, and when you hear those newsreaders out there on BBC and ITV saying, the stock market has fallen, you will actually be saying, "What can I buy?"
Ben: Yeah, I'm going to sit back and rub my hands together.
David: You are not going to say, "Oh my goodness!"; you're going to say, "Buying opportunity."
Ben: Yeah, exactly.
David: That's wonderful -- thank you ever so much for coming in today. I have been David Kuo, this has been Money Talk, and my guest has been Ben Golland, our intern here at the Fool for two weeks. If you have a comment about today's show, please post it on the Money Talk Web page, which you can find at fool.co.uk. Until next week, have a great week, everyone.
That was the second part of a two-part transcript in which Fool.co.uk's David Kuo chats with intern and novice investor Ben Golland about 10 shares he would put in his beginner's investment portfolio. In the first part of the transcript, Ben discusses what he has learned in his two weeks at The Motley Fool. Continue reading Part 1.
David Kuo challenged his Motley Fool analysts to pinpoint the attractive sectors of 2012 -- and they delivered! Discover the industries they selected in this new Motley Fool guide -- "Top Sectors of 2012" -- while it's still free!
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