The FTSE 100 index is home to many top companies. So picking the best Footsie shares to invest in is not an easy task.
However, if I could only own three FTSE 100 shares, here’s what I’d go for.
A Warren Buffett-type FTSE 100 stock
The first FTSE 100 stock I’d buy is Unilever (LSE: ULVR). It’s a leading consumer goods company that owns loads of well-known, trusted brands such as Dove, Persil and PG tips.
Why would Unilever be my first pick? Simply because it’s a world-class business. It’s the type of company that Warren Buffett invests in (Buffett actually tried to buy it a few years ago).
Unilever has a lot going for it. For starters, it has a strong competitive advantage due to the power of its brands. As a result, it’s a very profitable company. Over the last five years, return on equity has averaged 45%.
Secondly, it’s a very reliable company that’s pretty much recession-proof. It has a great long-term track record when it comes to generating shareholder wealth.
On top of this, it’s well-positioned for growth over the next decade due to its exposure to the emerging markets (50%+ of sales).
All in all, I see Unilever as an excellent core holding. The stock isn’t cheap, however, I believe it deserves a premium valuation.
Dividend growth champion
The second FTSE 100 stock I’d go for would be Diageo (LSE: DGE). It’s an alcoholic beverages giant that owns a number of well-known spirits brands such as Johnnie Walker, Tanqueray and Smirnoff.
Like Unilever, Diageo is a high-quality company. Over the long term, it has generated considerable wealth for shareholders. Just look at the dividend growth track record here. Diageo has now registered 22 consecutive annual dividend increases, which is an outstanding achievement.
DGE also has plenty of growth potential going forward. In the next decade, around 750m extra consumers in the emerging markets will be able to afford its products. I expect that in 10 years’ time, its sales will be much higher than they are today.
Diageo shares have pulled back this year due to Covid-19. I see this share price weakness as a great buying opportunity.
For my third pick, I’d choose Sage (LSE: SGE). It’s a leading provider of ‘cloud-based’ accounting solutions and is trusted by millions of businesses worldwide. Sage would provide me with some exposure to the fast-growing technology sector.
Sage is another high-quality FTSE 100 business. It generates a lot of recurring revenues (customers can’t switch to a competitor easily) and is a very profitable company. It also has a strong balance sheet and a fantastic long-term dividend growth track record.
Looking ahead, the growth potential is significant. Between now and 2025, the market for cloud-based accounting solutions is forecast to grow at nearly 9% per year. Sage currently has around three million customers. However, it believes its total addressable market is nearly 70m businesses.
All things considered, I think Sage is a top FTSE 100 stock. And I’m not the only one who is bullish here. Sage is admired by both Terry Smith and Nick Train – two of the UK’s top portfolio managers.
Of course, I believe in diversification. Currently, I own nearly 20 FTSE 100 shares in my portfolio. However, if I had to pick only three Footsie stocks to invest in, these are the stocks I’d go with.
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Edward Sheldon owns shares in Unilever, Diageo, and Sage. The Motley Fool UK has recommended Diageo, Sage Group, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.