Multi-billionaire Warren Buffett, probably the world’s most famous and successful investor, follows a strategy of buying great businesses with a view to holding his shares ‘forever’.
What’s good enough for octogenarian Buffett should be good enough for an investor just starting out on the road to long-term wealth accumulation.
Today, I’m going to tell you why I think HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US), Reed Elsevier (LSE: REL) (NYSE: RUK.US) and Pennon Group (LSE: PNN) are worth consideration for a beginner’s portfolio.
HSBC Holdings
Even if you’re new to investing, you’re probably aware of the losses suffered by bank shareholders during the financial crisis of 2008/9, and may be wary about investing in the sector as a result. But, precisely because of that crisis, and tough new regulations, banks should be a lot less risky in future.
HSBC is the second-largest company, and far and away the biggest bank, in the FTSE 100. In fact, this £124bn ‘megacap’ is bigger than Lloyds, Barclays and Royal Bank of Scotland combined.
The big attractions of HSBC for a beginner’s portfolio are its size, geographical diversification, and — with the shares priced at 650p at the time of writing — a prospective dividend yield of 4.7%. Reinvesting dividends to buy more and more shares should snowball the value of your investment over the long term.
Reed Elsevier
Reed Elsevier will be less well known to new investors than HSBC. Nevertheless, this Anglo-Dutch media group is an £11bn FTSE 100 company, and a world leader in its field.
Reed Elsevier serves professionals across the business, scientific, medical and legal sectors, combining must-have content and data with analytics and technology. The company should continue to thrive on demand for its services in a world of ever-increasing information.
Reed Elsevier’s shares — currently trading at 980p — aren’t the cheapest around on many valuation measures, but investors can take some comfort from the company’s new finance director buying £342,000 worth at a price of 996p.
Pennon Group
Water companies, as regulated utilities, are noted for being relatively steady businesses. For a new investor, with a long-term horizon, I’d tend to favour Pennon Group over its larger peers Severn Trent and United Utilities.
In addition to its regulated water business — South West Water — Pennon owns waste management firm Viridor. Viridor is currently being transformed from a predominantly landfill operation to a business with much more focus on recycling and energy-from-waste. Viridor has the potential to boost Pennon’s long-term returns beyond those of a pure regulated water company.
At a share price of 788p, Pennon offers a prospective dividend income of 4.1%, which, reinvested, should nicely compound the value of your investment over time.