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Beginners’ Portfolio: Should We Buy Lloyds Banking Group PLC, SSE PLC Or Sirius Minerals PLC?

This article is the latest in a series that aims to help novice investors with the stock market. To enjoy past articles in the series, please visit our full archive.

The Beginners’ Portfolio is a virtual portfolio, with all costs, spreads and dividends accounted for. Transactions are for educational purposes only and do not constitute advice to buy or sell.

Dumping Tesco last month raised £358.88 for the portfolio. With the few pounds cash in the kitty, plus dividends from Rio Tinto, BAE Systems, Aviva and Barclays, we have a total of £472.35 that needs to be invested — and with the portfolio aiming at around £500 per investment, I reckon that’s enough cash to start looking for our next purchase.

There are two clear candidates I’ve had my eye on for a while, with another recently popped up on my radar:

Lloyds

Lloyds Banking Group (LSE: LLOY)(NYSE: LYG.US) has looked like a bargain for a long time to me, and the closer it gets to sustained long-term growth the cheaper it looks. Results for 2014 were pretty much as expected, with a significant rise in profits and the reinstatement of the dividend — albeit only a modest 0.75p per share, for a yield of 1%.

The dividend marks a major turning point, as it would not have been possible had the PRA not been satisfied with the bank’s liquidity and convinced Lloyds could afford to resume paying out cash. For this year the City’s analysts are already forecasting a 3.5% dividend yield, with 5.3% in 2016. It’s obviously too early to bank on those, but with the shares trading at 76p now, further expected earnings growth puts the shares on a forward P/E of under 10, and I think that’s just too cheap.

The argument against Lloyds is that we already have a bank in the portfolio in Barclays, and it’s a strong one too.

SSE

I’ve also thought for some time that we should have a utilities supplier, and SSE (LSE: SSE)(NASDAQOTH: SSEZY.US) is looking especially good to me now. We have a few flat years for earnings forecast, and at 1,595p the shares are on a P/E of around 14, which is not overstretched — certainly not for a stock expected to provide dividend yields of between 5.5% and 6%.

There was always political risk investing in energy suppliers, as they were the easy “nasty capitalist” targets for politicians seeking election. But with oil prices having slumped and retail energy prices easing, that’s out of the limelight now and the political risk really does look like it’s fading.

Sirius

In addition to those two, my attention has been drawn towards Sirius Minerals (LSE: SXX), and the investment proposition is really quite simple. The company is sitting on the largest, and highest grade, known deposit of the polyhalite form of potash in the world, and that’s stuff that makes for very good fertilizer. If it gets permission to develop it, it could make a lot of money — and if it doesn’t, it won’t. The signs, though, are encouraging, with the firm’s harbour plans getting a step closer to approval.

Part of the reason I’m warming to Sirius is that this is supposed to be a beginners’ portfolio, and beginners have decades ahead of them and are at an ideal stage in their investing careers to go for the occasional higher-risk growth opportunity. So far my forays into growth have not done well, but with Sirius there’s tremendous transparency in that we know exactly what it has and exactly what the demand is. And there are no controversies surrounding the firm’s management or its accounting policies. It’s a risk, but very much a known risk.

I’ll make the decision soon.

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Alan Oscroft 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.