Trying to build your own investment portfolio from scratch can be a daunting prospect, but in reality it’s quite easy.
A key way to start search for opportunities is to search out stocks that fit into one of two groups: growth and income. Of course, shares that offer the perfect blend of growth and income are the best picks.
And on that basis, GlaxoSmithKline (LSE: GSK), Santander (LSE: BNC) and Unilever (LSE: ULVR) look to be three perfect starter portfolio picks.
Income play
When it comes to income, Glaxo ticks all the boxes. At present levels the company offers a dividend yield of 5.1% and the payout is covered one and a half times by earnings per share. The long-term, defensive nature of Glaxo’s business means that it is perfect for any beginner’s portfolio, too.
Along with a range of pharmaceutical products, the company also produces a leading range of consumer healthcare products, such as toothpaste, mouthwash, Panadol, skincare products and even Horlicks. The essential nature of these products means that customers will continue to buy from Glaxo day after day, giving the company a predictable income stream and base to grow from.
Unfortunately, due to Glaxo’s defensive nature and lofty dividend yield, the market has put a premium valuation on Glaxo’s shares. The company currently trades at a forward P/E of 17.3 but as an income play this premium is worth paying for Glaxo’s market-leading dividend yield.
European growth
As a growth play, Santander is a great pick. Now, usually I’m not a fan of banks, but Santander has shown over the past year that it is not a normal bank. After Emilio Botín — who ran the bank for 28 years — died in September, the bank has made some drastic changes.
In particular, after raising $9bn in new capital and cutting its dividend payout, Santander is set to become one of Europe’s most liquid banks. By 2016 the group’s tier one ratio, under Basel three standards, is expected to be in the region of 10% to 11% compared to expectations of 8% to 9% for peers.
A stronger balance sheet gives Santander more room to grow and benefit from economic growth within Latin America, and a return to growth within Europe. Management expect the capital raising to start contributing to growth by 2016.
There’s also the improving European economy to consider. Standard should benefit from increased business activity as well as a lower level of loan impairments throughout the rest of the decade.
City analysts expect Santander’s earnings per share to expand at a mid-teens rate every year until 2017 — that’s growth worth paying for. At present Santander trades at a forward P/E of around 12, and based on the group’s projected growth rate this indicates a PEG ratio of 0.9.
Long-term play
Unilever offers the rare combination of both growth and income. Further, just like Glaxo, Unilever produces and sells a range of every day consumer products and food, which makes the group a defensive pick that’s well placed to generate long-term growth.
But just like Glaxo, Unilever is also expensive at present levels. The company currently trades at a forward P/E of 21.3 and supports a dividend yield of 3.2%.
Still, sometimes you have to pay a premium for quality and it’s worth paying extra for Unilever’s defensive nature and long-term growth outlook. For investors who are just starting out in the stock market, you can’t go wrong with Unilever.
