If you have £3,000 to invest and want to start picking individual shares, perhaps for the first time, I reckon it pays to cut your teeth on some of the UK’s largest stock market-listed companies. You could start your search in the FTSE 100 index of Britain’s largest public companies.
Benefits of going large
Several benefits flow from choosing larger companies. For example, corporate governance tends to be more reliable than in smaller firms. That means you shouldn’t face too many problems from errant directors or dodgy practices. There’s also good liquidity in large company’s shares, so you can buy and sell shares easily and without large costs because of wide spreads between the bid and ask prices quoted. Then there’s the big advantage that FTSE 100 firm’s share prices tend to move more slowly than smaller company’s shares, which gives you more time to react to news flow from the company. With the shares of small firms, big movements in the share price can occur almost instantly, which often means it’s almost impossible to get out before the plunge if the news is bad.
Having said that, if you’re investing in shares, you’re putting your faith in the businesses behind the shares, which means it’s important to give your investment time so that operational progress can drive your returns. I recommend that you approach any investment with the idea that you’re prepared to hold the shares for at least five years, and often for longer than that.
£1,000 is the minimum I’d invest in a single share because transaction costs will be too large a percentage of the initial sum otherwise, which makes it hard to achieve an investment gain. Those transaction costs include the bid/offer spread, dealer charge, and stamp duty (tax). But you can split your £3,000 into three and buy FTSE 100 shares comfortably. And I’d put forward for consideration pharmaceutical giant GlaxoSmithKline (LSE: GSK), consumer goods Goliath Unilever (LSE: ULVR), and premium drinks supplier Diageo (LSE: DGE).
Defensive dividends and growth
What I most like about these three is that they all have defensive businesses, which means that demand for their products tends to remain stable whatever the general economic backdrop. People rarely go without GlaxoSmithKline’s medicines, or Diageo’s branded alcoholic drinks, or Unilever’s big-name cleaning, food and personal care products. The opposite of a defensive business is a cyclical business where the company’s fortunes rise and fall depending on general economic conditions.
All three of these companies have a good record of steady incoming cash flow, which makes it easier for them to pay consistent dividends to investors. And I see the dividend yields as attractive. At recent share prices, GlaxoSmithKline is yielding around 5.4%, Unilever close to 3.4%, and Diageo about 2.5%. I expect the dividend payments to rise a little each year, driven by that steady incoming cash flow and the strength of each company’s brands.
City analysts are predicting that all three firms will grow their earnings over the next couple of years, which is encouraging. If you have £3,000 to invest in January, I think these firms are well worth your further research time and consideration.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended Diageo. 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.