Beginners' Portfolio: We Buy a Miner

This article is the latest in a series that aims to help novice investors with the stock market. To enjoy past articles in the series, please visit our full archive.

LONDON -- After our last Beginners' Portfolio update, we got some great suggestions about where to look next, with forum contributor ANuvver pointing out that the portfolio does not yet have any international consumer-products shares like Unilever or Reckitt Benckiser (LSE: RB.L). And that's a very good point.

I've always thought such companies makes a solid foundation for a portfolio, as they tend to provide dependable (if not necessarily the highest) dividends. And they're defensive during downturns, helping to reduce the portfolio's volatility.

It's true that neither of these two is especially cheap right now. Unilever shares are up 10% over the past 12 months and on a forward price-to-earnings ratio of nearly 18 (higher than the FTSE long-term average of around 14), while Reckitt Benckiser is up around 7% and on a P/E of 14.5.

An international dimension?
But I wouldn't let that hold me back, as quality shares are rarely cheap, and a dependable 3.5% dividend with modest share price growth is attractive.

Another option might be to go for Procter & Gamble, which would also provide a bit of education on purchasing U.S. shares and on understanding the differences in company reporting between the two countries -- and I really would like to add one U.S. stock to the portfolio.

The latest purchase
Anyway, I'll leave that for a future decision, and in the meantime I've gone in a different direction: We now have Rio Tinto (LSE: RIO.L) shares in the virtual portfolio. The transaction went like this:

A purchase of 16 shares at 3,048.4 pence each came to 487.74 pounds. Including 10 pound commission and 2.44 pounds in stamp duty, we had to cough up a total of 500.18 pounds. That makes the portfolio so far look like this.

Why a miner, and why Rio Tinto?
I've always been an advocate of buying good companies when they're cheap and buying into cyclical industries when they're in a down phase. It might sound obvious, but a lot of people don't manage it.

I don't care too much about how the Chinese economy goes over the next year or two (other than wanting things to go well, for many reasons), and I care little for the short-term price of metals and minerals -- even if it does push miners down even further in the short term.

Where there's muck...
But what I am confident of is that a 43 billion pound miner producing iron, aluminium, copper, coal, and other earthy delights, and which is on a forward P/E of just 7.7 for this year and 6.4 for next, is simply too cheap. Anyone who doesn't think the world will need every last ounce and more of the valuable dirt dug up by Rio and its fellow miners over the next 20 or 30 years is, well, maybe someone who has invented a Star Trek replicator -- and I think we would have heard about that.

Rio's net debt of $13.2 billion at its interim stage on June 30 is no big deal, coming as it does from increased capital expenditure and acquisitions -- not for a company turning over 38 billion pounds a year, anyway. I actually think any one of the big FTSE 100 miners would make a good purchase right now, but I've gone for Rio based largely on a balance of its low valuation and the range of resources it digs up.

What next?
I've decided to restrict the portfolio to 10 shares, as that should give us nice diversification and provide enough companies to track and talk about as things progress, but without swamping us with too much.

That means there are three slots left. One may well go to a consumer products company, and one to a U.S. stock (which might be the same one). And I think one might be another higher-risk punt (so if you are working on that replicator, do let me know).

Thoughts on this latest purchase and suggestions for the final buys are, as always, welcome in the comments section below.

In the meantime, if you want to follow the strategy of buying strong dividend-paying shares -- like some of the ones we have here -- Neil Woodford is an acknowledged expert on it. The free Motley Fool report "8 Shares Held By Britain's Super Investor" takes a look at some of his major holdings. Click here to get your free copy while it's still available.

Are you looking to profit from this uncertain economy? " 10 Steps To Making A Million In The Market " is the very latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- it's free.

More for beginners:

• Investment For Beginners: Archive
• What Every New Investor Needs To Know
• Top Sectors Of 2012