Analysing FTSE stocks can be intimidating for newbie investors. For instance, the FTSE 100 has a combined market capitalisation of nearly £2trn at the time of writing.
I’ve laid out below two companies on my watchlist that I would consider beginner stocks if starting a portfolio from scratch.
Shelling out for dividends
Shell (LSE: SHEL) is a multinational oil and gas company with a market cap of over £150bn and a 4.1% dividend yield.
Shell recently upped its dividend after reporting its second-highest earnings since 2011.
I like the idea of receiving dividends, especially for a capital-intensive business like Shell. This is because I subscribe to the “bird in the hand” theory in an elevated inflation environment.
That means I value cash returned today over unknown potential growth in the future from reinvestment. Shell has shown it can generate profits and can return that to its shareholders.
The other reason I like the FTSE 100 oil and gas stock is the sector in which it operates.
Energy has historically provided a good hedge against inflation. Increased demand for energy as we’ve seen recently can lead to increased energy prices.
While rising input costs like energy hurts profitability for a manufacturing company, the higher commodity prices are actually beneficial for the likes of Shell through higher sales prices and revenues.
With strong cash generation, a propensity for dividends and a potential inflation hedge, Shell is one of those stocks at the top of my watchlist.
However, oil and gas is a cyclical sector. That means things can change quickly if the economy slows, including earnings and profitability.
It’s important for me to understand all the risks before buying into more volatile industries. Diversification is another important aspect, particularly when if I’m trying to build a portfolio of FTSE stocks from scratch.
Where there’s smoke, there’s cash flow
Another one of the behemoths I’m watching is British American Tobacco (LSE: BATS). Shares in the global tobacco company are currently trading at a tasty 9.5% dividend yield.
On the surface, that might look like a ’smoking’ buy. However, there’s a reason British American is on the watchlist and not yet in my portfolio.
The FTSE stock is down nearly 25% in the past 12 months. That includes an 8.4% one-day decline back in December when it took a large impairment on some of its US cigarette brands due to economic headwinds impacting sales.
I’m not writing off the stock just yet. As the great Warren Buffett once said, “Price is what you pay. Value is what you get”. In other words, anything can be a bargain given the right entry point.
British American has a long history of generating profits for investors. Yes, the industry is changing rapidly due to regulatory and behavioural shifts. That creates some long-term challenges for the stock.
However, the company does have a £52.2bn market cap and is forecasting c.£40bn in cumulative free cash flow over the next five years.
Throw in the fact that tobacco has historically seen stable demand during recessions, and British American remains firmly in my sights if I see further declines in 2024.
