As a long-term investor ready to put my first £1,000 in the stock markets, I’d like to ensure capital protection and passive income generation. This will allow me to re-invest more money and continue to grow my capital base.
Unfortunately, in the past few years, the FTSE 100 index has fluctuated, providing no assurance of steady returns. As a result, a number of shares have seen falling share prices, and these include some of the biggest companies (by market capitalisation) listed on the exchange.
Stay away
These are exactly the stocks I’d like to stay away from. Consider the example of the telecom provider Vodafone, which has seen a broad decline in share price over the past five years. Even if I were to consider a longer-term time frame, it doesn’t inspire much confidence. Similarly, the Standard Chartered share price trends have been weak in the past years.
Consider these
There are a number of stocks, however, which have avoided a share price fall. They might not always show an increase in share price, but they haven’t shown a decline either. I’d consider only this set of companies for my first investment. Consider the example of the oil giant Royal Dutch Shell (RDSB), which is also the biggest FTSE 100 company by market capitalisation. It’s share price has fluctuated within a range for a long time, but the trend line is steady. Another example is the London Stock Exchange group, which has shown a consistent stable to rising share price trend over much of the past decade.
Focus on dependability
Of this sub-set of stocks, I’d next identify the ones that have the highest dividend yields. Shares like RDSB, HSBC, and Persimmon offer attractive dividend yields of over 7%. But that’s in the present. I’m also interested in knowing if they can continue to provide these yields in the future.
One indicator of the future is the past. If a company has historically had a policy of paying dividends, it may well in the future too. Of the three shares highlighted, for instance, RDSB and HSBC have a history of sustained dividends. PSN, on the other hand, has been paying dividends regularly only since 2016. This by itself makes it less attractive to me than RDSB or HSBC.
Future guidance
I also look at the company’s guidance on dividends. Both RDSB and HSBC have reported poor earnings recently, which can create doubt in investors’ minds about their future ability to generate a passive income. But they have ensured that at least in the foreseeable future, their dividend policies will remain as is.
This isn’t always the case. For instance, one of the top dividend payers among the FTSE 100 set of companies is Imperial Brands, which announced changes to its policy last year. In this case, however, RDSB and HSBC do appear to be good investing choices based on my initial goals. Variations of this investing style are possible, but to me, this is a good place to start.