Many investors get through their entire lives without ever owning an individual stock. But you don't have to let stock picking intimidate you. Right now, some of the most solid stocks you could ever want trade at reasonable prices -- prices that just beg you to buy shares while they last.
Taking the next step
The amazing thing about investing is that you don't actually need to buy individual stocks in order to succeed with your investments. Thanks to mutual funds and ETFs, it's easy to put together a core portfolio that gives you immense levels of diversification and broad exposure to just about every asset class you can imagine. With just a few funds, you can get a simple portfolio you can use to achieve all your financial goals.
But relying solely on funds is extremely limiting. Here are some of the downsides:
- You end up with some lousy stocks. Take a look at the dregs of the S&P 500, and you'll see a number of companies that you'd probably never touch if you had to buy them separately. Just like all those channels in your cable TV package that you never watch, those crummy stocks are dead weight in your portfolio.
- You don't get the same experience investing in funds. Even focused investments like sector ETFs don't force you to drill down on company financials the way buying stocks does.
- You pay more. Every fund has a management fee, whether it's the rock-bottom charge for a big index ETF or the higher costs of active management. With individual stocks, once you pay the brokerage commission to buy shares, you're done.
Still, making the leap to individual stocks is scary. With a fund, even if something goes really wrong with a particular holding, it won't cause the whole fund to tank. Individual stocks, on the other hand, can lose huge amounts of value in a single day. Ideally, you'd like a smoother ride than that.
Going for the core
To find stocks that even conservative investors can get behind, I've spent the last couple of months looking for companies that have the right combination of desirable characteristics. In my Right Stock to Retire With series, I search for stocks that have done several things right:
- They pay substantial dividends with track records of growing payouts.
- They trade at reasonable valuations while showing steady sales and cash flow growth.
- Their shares have avoided big plunges even during bear markets.
Here are some of the stocks that have posted the best overall scores:
|
Stock |
Worst Annual Loss in Past 5 Years |
Normalized P/E |
Dividend Yield |
|---|---|---|---|
|
McDonald's |
4.0%* | 18.79 | 3.2% |
|
Novartis |
(6.9%) | 15.38 | 4.3% |
|
Colgate-Palmolive |
(10.1%) | 17.80 | 2.8% |
|
Becton Dickinson |
(16.9%) | 18.73 | 2.0% |
|
Chevron |
(18.3%) | 11.29 | 2.6% |
|
PepsiCo |
(26%) | 18.06 | 2.9% |
|
Medtronic |
(36.3%) | 15.76 | 2.3% |
Source: Capital IQ, a division of Standard and Poor's. *McDonald's hasn't suffered a loss in the past five years.
Notice that even the best stocks don't get everything right. Medtronic, for instance, suffered during the recession as spending on medical equipment plummeted because of unemployed workers not being able to afford medical procedures and because of hospitals trying to cut back on expenses.
Moreover, just because these stocks have done well in the past is no guarantee that they'll do so forever. Buying even the safest-looking individual stocks is a commitment to keep track of them, in order to make sure that you stay on top of any unexpected surprises and take appropriate action before they blossom into big problems.
Get a good start
What these stocks will give you, though, is a good platform on which to build. With familiar names and relatively simple business models, you can get your feet wet in stock investing without getting in over your head. And as you gain experience, you can draw comparisons with other stocks and gradually become an investing expert.
So even though you could go your whole life simply investing with mutual funds and ETFs, I think it would be a sad thing. With the potential that individual stocks bring, you owe it to yourself to make them the core of your portfolio.
If you like these stocks, you owe it to yourself to follow them for future research. Add them to your watchlist to stay up-to-date on what they're up to.
Learn all the basics of financial planning with our 13 Steps to Investing Foolishly. It'll get you on track to a great financial plan in no time.
