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Want to start investing? Here are two top stocks from the UK’s Warren Buffett

Image: Woodford Funds. Fair use.

Investing for the first time can be a daunting experience. There’s a huge amount to learn before you get started and even when you think you’ve learned everything, the market will throw a new challenge at you. 

Picking your own stocks is an even more daunting prospect. There are thousands of stocks out there to choose from and tens of thousands if you include overseas equities. With this being the case, it’s often easier just to follow high-profile investors that have already made a name for themselves in the investment industry and produced impressive returns for investors over the years.

Neil Woodford is one such investor, and he’s generally considered to be the UK’s version of Warren Buffett, having outperformed the market for decades.

Neil Woodford’s portfolio is always full of trustworthy blue-chip stocks, which have a history of looking after shareholders. And thanks to his desire to only invest in the best companies, his portfolio is an excellent place to start looking for equity investments if you’re new to investing.

British American Tobacco (LSE: BATS) and Legal & General (LSE: LGEN) are two of the top 10 holdings in his equity income fund and these companies are two top picks for any portfolio. 

Time-tested 

Legal & General has been around for more than a hundred years and the company has what it takes to continue to churn out returns to shareholders for another century. 

The business manages pensions, life insurance and saving plans, all of which are very long-term products giving Legal a highly predictable recurring income stream that’s not likely to disappear any time soon.

The business is highly cash generative and management returns the majority of unneeded cash to investors. This year City analysts expect the company to pay a total dividend of 15.2p per share for a yield of 6.1%. The payout will be covered an estimated 1.5 times by earnings per share and shares in Legal currently trade at a forward P/E of 11.5.

Income champion 

Meanwhile, although smoking may not be everyone’s cup of tea, British American is an income investor’s champion. The company’s dividend payout has been consistently covered one-and-a-half times by earnings per share for the past decade. 

Earnings per share are expected to grow by 18% for the financial year ending 31 December 2016, a further 15% for 2017 and 7% for 2018. So, while the company’s shares may look expensive now as they trade at a forward P/E 19.2, by 2019 this valuation should have fallen to around 15.5. 

These figures do not include any contribution from the merger with US peer Reynolds American (another of Neil Woodford’s holdings) announced today. Under the terms of the deal, British American will buy the 57.8% stake it doesn’t already own for $59.64 per share. The deal will create the world’s largest tobacco company and British American is forecasting $400m worth of cost-savings through the merger.

Now this deal is going ahead, I’d expect even faster earnings growth from the enlarged group through to the end of the decade. City analysts are expecting the firm’s dividend payout to increase by around a third by 2018 giving a potential yield of 4.1%.

Make money, not mistakes

A recent study conducted by financial research firm DALBAR found that the average investor realised an annual return of only 3.7% a year over the past three decades, underperforming the wider market by around 5.3% annually thanks to poor investment decisions. 

To help you streamline your investment process, realise and understand the most common investor mis-steps, the Motley Fool has put together this new free report entitled The Worst Mistakes Investors Make.

The report is a collection of Foolish wisdom, which should help you avoid needlessly losing too many more profits. Click here to download your copy today.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.