Novice investors often ask me for share tips, but I won’t give them — when you’re new to the investing game, you should learn what kinds of qualities to look for rather than being told what to buy. To that end, I’m going to look at a selection of top shares to see if they tick some of my boxes for beginners. Today I’ll start with Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US).
What it does
I’d never invest in a company if I didn’t understand what it did, and on that score Centrica scores highly. It supplies gas and electricity, under the Scottish Gas brand in Scotland and British Gas in the rest of the UK. “Produces and/or buys X, sells X” is a pretty easy business model to understand, especially when the X is as simple as gas and electricity.
Safety
Losing early money is one of the biggest reasons for getting scared and giving up, and that’s why I think newcomers should avoid risk as far as possible — you can deal with risky shares once your nerves are more battle-hardened later!
And I don’t think you can be in a much safer business than selling energy. Everyone needs it, there are millions of guaranteed customers, revenues are among the most predictable ever, and there’s just about no chance of small upstarts muscling in on the market.
Income
A common mistake is to only consider share price movements and not think about dividends. With the FTSE 100 offering a forecast average dividend yield of 3.2%, you can think of shares as providing a better income than a savings account — with any share price gains thrown in as a bonus!
With their very predictable finances, energy suppliers are able to pay a high proportion of their earnings out as dividends, and Centrica typically provides a yield of between 4% and 5% per year. Even if you buy Centrica shares now and they never go up in price, the chances are you’ll still beat the bank.
Track record
Look back on a share’s history, and if you see bloodstained tales of disaster, it’s probably one for novices to avoid. You may not remember the dotcom boom and bust, but I was living and investing right through it, and that one short period put more people off the idea of shares than anything else I’ve ever experienced.
Examine Centrica’s last decade, and you’ll see share price ups and downs, sure. But there are no aneurysm-inducing booms or bone-crunching busts to be seen, and the dividends have been trickling in surely and predictably.
Of course, the old legal disclaimer that “past performance is no guarantee of future performance” holds true, but if you’re trying to avoid unpleasant surprises it can be a great help as part of the bigger picture.
Finally, if you want another idea for a share that I think is well worth considering for novices, check out the Motley Fool’s Top Income Share report. I won’t tell you what it is, but I’ll give you a clue — it’s in a similar business to Centrica, and it’s offering a dividend yield of better than 5.5%!
If you want to know more, click here to get your free copy today.
> Alan does not own any shares mentioned in this article.