If you're just starting to invest, you may be feeling overwhelmed. There are thousands of stocks to choose from, and it may feel impossible to know which ones are best for you.
In order to guide you on your journey to investing success, three experienced Motley Fool contributors suggest three options that are bound to be winners. You can't go wrong with any of them, as long as you hold them for the long term.
Make it easy: Buy the world
Chuck Saletta: Investing in stocks can be a great way to build wealth over time. The problem is that not every stock turns out to be a winner. Indeed, history is littered with the carcasses of companies that were unable to sustain themselves for the long haul.
As a result, if you want to make money investing in stocks, you either have to spend time researching and watching businesses or find a way to invest that doesn't require all that effort. That's where buying broad-based index funds can come in handy. They let you get the market's long-term performance without all the research.
When it comes to index funds, the Vanguard Total World Stock Index ETF (NYSEMKT: VT) stands out as one with a particularly broad objective. It aims to track a wide-ranging index that encompasses large-, mid-, and small-cap companies based all over the world. Because this exchange-traded fund (ETF) casts such a broad net, investors are set up to get returns based on the overall global economy, not any one stock or country's performance.
Combine that scope with its tiny 0.08% expense ratio, and this ETF is a great way to get the global market's returns without the effort or risk associated with picking specific stocks.
Of course, you're still exposed to overall market risk, and there's no guarantee that the market will go up. That's why the Vanguard Total World ETF — like any stock-focused investment — should only be used for money you don't expect to spend for at least the next five years. With that longer-term time frame, you can better stomach the ups and downs of the market as you won't be putting your immediate needs at risk from the daily volatility inherent in stocks.
A real digital moneymaker
Eric Volkman: One class of stocks I have always found to be appropriate for beginner investors is real estate investment trusts (REITs). A REIT is a company that puts its money in either properties, the mortgages that undergird them, or (in relatively rare instances) a combination of both. There are scores of REITs on the market, and many specialize in one or only a few types of real estate.
Essentially, a REIT is a real estate fund in which investors place their confidence in an experienced manager who knows how to squeeze juicy profits out of a set of property assets.
One very appealing facet of REITs — particularly for people just starting out in their stock investing life and looking for a reliable return on their money — is dividends. REITs are legally obligated to pay out at least 90% of their net profit in this form of shareholder remuneration.
One REIT that I bought recently for my IRA, and that I think should be considered by anyone new to stocks, is Digital Realty Trust (NYSE: DLR). This company falls into the “specialty REIT” category, and its specialty is data centers (basically, the warehouses where banks of computer servers are stored) and associated assets. This is what makes it a compelling, “set it and forget it” investment.
Unlike the retail sector, which has been battered by the migration to e-commerce (not to mention the economic damage of the coronavirus pandemic), data centers are only going to see continued growth in demand.
After all, those are the facilities that are helping to continue the digital revolution. Your favorite online retailer almost certainly has a clutch of servers spread around various data centers to power its digital efforts.
As a result, Digital Realty's growth has been compelling. 2020 revenue topped $3.9 billion, for a year-over-year rise of nearly 23%. There aren't many REITs that can boast that kind of improvement. “Core” (i.e., adjusted) funds from operations (FFO is a key profitability metric for REITs) rose by 16% to almost $1.7 billion, or $6.22 per share. The company is guiding for an increase to at least $6.40 in 2021.
Meanwhile, Digital Realty has managed to lift its dividend annually for 16 years running. Over that stretch of time, its yearly payout has more than quadrupled, from $1 per share to $4.64. This results in a respectable dividend yield of 3.3%.
Digital Realty is a reliable and experienced operator that focuses on an ever-growing corner of the economy and returns a nice dividend to its shareholders on the regular. So it's definitely a fine stock for a newbie — or any investor, really, who's fond of that winning combination.
A stock for the centuries
Barbara Eisner Bayer: Both my colleagues have recommended starting with different baskets of stocks, and both recommendations are fantastic ideas for beginners. But what if you want to dip your toes into the stock market waters and buy an individual stock? In that case, you can't go wrong with Johnson & Johnson (NYSE: JNJ).
First, if you're just starting out purchasing equities, there are a few guidelines to follow. It's a good idea to begin with a company you're familiar with, and JNJ hits the mark on that one. Ever heard of Band-Aids, Tylenol, and Listerine? Yep… they're all manufactured by JNJ, along with an impressive list of products you use every day.
Second, determine if the company is stable. J&J has been around for over 130 years, so there's almost zero chance it won't be around during the course of your lifetime. It's also a Dividend King, having paid and increased its dividend for 58 consecutive years. That's an awesome track record that doesn't look like it's slowing down anytime soon.
Third, what are the company's growth prospects? For Johnson & Johnson, the sky's the limit, because the consumer division is just a small part of its future.
To begin with, there's its coronavirus vaccine, which recently received Emergency Use Authorization. Even though its efficacy was only 85%, which was a bit lower than the vaccines produced by its competitors, it only requires one dose, whereas the others require two. That has the potential of making it easier to get into people's arms. Plus, it's easier to store, which makes it easier to provide worldwide.
But it's JNJ's other divisions that have the potential to help the company — and the stock — keep growing. Its consumer health, medical devices, and pharmaceutical segments combined to bring in $82.6 billion in revenue in 2020 — and that included a slowdown due to the coronavirus pandemic. The company is developing therapies that target various diseases, including leukemia, Crohn's, and prostate cancer, which are in late-stage clinical trials. Add to that a pipeline of 50 potential therapeutics, and you've got dazzling growth potential on the way.
If you're looking for a starter stock, you can't go wrong with Johnson & Johnson. While it may not, in itself, make you a millionaire, it certainly can be the basis of a portfolio that will.
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Barbara Eisner Bayer has no position in any of the stocks mentioned. Chuck Saletta has no position in any of the stocks mentioned. Eric Volkman owns shares of Digital Realty Trust. The Motley Fool owns shares of and recommends Digital Realty Trust. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.