The best approach, in my view, is to keep things simple and start by investing in some rock-solid companies that can be ‘core’ portfolio holdings. With that in mind, here’s a look at three stocks I’d buy if I was starting an investment portfolio today.

Apple

One stock that strikes me as a great investment for beginners is Apple (NASDAQ: AAPL). This is Warren’s Buffett’s largest stock holding.

There are a few reasons I see Apple as a good beginner’s stock. For starters, the company is easy to understand. Apple makes money from selling iPhones, iPads, computers, and other hardware. It also makes money from services such as iCloud, Apple Pay and Apple Music.

Apple has a great growth track record and looks set to continue growing in the years ahead. This year, analysts expect the company’s revenue to rise nearly 30%.

Finally, the stock’s valuation is attractive. Apple trades on a forward-looking price-to-earnings ratio of 28, which seems reasonable to me.

One thing the beginner version of me would have to be aware of is that because the stock is US-listed, UK investors face foreign exchange (FX) risk. If a UK investor like me buys Apple shares and the pound strengthens, the investment is going to be worth less.

Unilever

Another stock that I believe is ideal for beginners is Unilever (LSE: ULVR). It’s a leading consumer goods company that owns a wide range of well-known brands such as Dove, Domestos, and Cornetto.

One reason I see ULVR as a good beginner’s stock is that it’s quite ‘defensive’ (i.e. lower risk) in nature. People tend to buy Unilever’s products no matter what is happening in the economy. As a result, it is not as volatile as some other stocks.

Another thing to like about Unilever is that it’s a reliable dividend payer with an attractive yield (currently around 3.4%). So, there are two potential sources of return here.

One risk to consider is that consumers’ tastes and preferences are always evolving. So, there’s no guarantee that Unilever’s brands will be as popular in the future as they have been in the past.

All things considered, I think the stock has an attractive risk/reward profile that would be good for the younger me.

Mastercard

Finally, I think Mastercard (NYSE: MA) is another top stock for beginners. It operates one of the largest payment systems in the world.

One thing I like about Mastercard is that, like Apple and Unilever, it’s an easy stock to understand. Everytime someone uses a Mastercard credit or debit card, it generates revenue.

Another thing I like about Mastercard is the long-term growth potential. Over the next decade, trillions of transactions are set to shift from cash to cards and electronic payments. Mastercard looks set to benefit.

One risk I’d consider here is that the valuation is quite high. Mastercard has a forward-looking P/E ratio of about 40. This doesn’t leave much ‘margin of safety.’ If future growth is disappointing, the stock could take a hit. It’s also listed in the US meaning there’s FX risk for UK investors. But there’s a lot to like about Mastercard, in my view. I see it as a great beginner’s stock.

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Edward Sheldon owns shares of Apple, Mastercard, and Unilever. The Motley Fool UK owns shares of and has recommended Apple and Mastercard. The Motley Fool UK has recommended Unilever and has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. 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.

Why is Warren Buffett such a fan?

Buffett compared owning lots of stocks to owning a zoo. This approach may protect my capital but it won’t necessarily grow it. 

A quick bit of maths bears this out. Let’s say I own 50 stocks. If one of these doubled, it would increase my overall portfolio value by 2%. However, the effect of a single stock doubling naturally has a greater impact using a concentrated strategy. In the same scenario, the overall portfolio value would rise 10% if I owned just 10 stocks.

Clearly, if I were able to repeat this performance over many years, my wealth would multiply far quicker!

In good company

It’s easy to dismiss Buffett’s take on the concentration/diversification debate. Praising the former when you’re already extraordinarily wealthy makes sense. However, he isn’t alone in believing that the best returns come from this strategy.

In his book ‘100 baggers‘, author Christopher Mayer highlights how many of the world’s most successful investors, such as Bill Ackman and Bruce Berkowitz, have only a few holdings. At the time of writing, these people had the equivalent of billions of pounds invested in only their best seven and eight ideas respectively. 

As far as the UK’s concerned, top fund managers like Terry Smith have long praised the concentrated approach. And the performance of Fundsmith Equity speaks for itself! 

So, am I 100% with Buffett?

I don’t agree with Buffett completely. I don’t have money to burn. Nor do I have the same level of experience in the markets as the 90-year-old all-time investing great. To be clear, there are certainly issues with me adopting this strategy.

Perhaps the most obvious is that I might own the wrong stocks. These could tumble on poor trading or even cease to exist! A stock that goes to zero reduces the value of a 10-stock portfolio by 10%. For a 50-stock portfolio, it’s a more palatable 2%. There’s also a psychological benefit of being diversified. A portfolio that keeps me awake at night just isn’t worth bothering with. 

On the flip side, owning a small number of stocks may give me an edge. Since more of my money is invested in them, I’m compelled to be up to date with developments and know why they’re worth holding.

This comes into its own when investing lower down the market spectrum. Many people simply don’t have the time or inclination to thoroughly research market minnows that could generate explosive returns in time. 

Bottom line

To his credit, Buffett thinks most people shouldn’t be concentrated investors. They should just invest in index funds and not try to beat the market. I’m inclined to agree, especially for those who have no interest in stocks.

For more active investors like me however, I think the message needs to be that there’s no ‘perfect’ number of stocks to own. Instead, my portfolio should reflect a sober evaluation of my tolerance for risk. Setting achievable goals is also vital.

Get this right and I could do well, albeit maybe never as well as the Sage of Omaha.

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Paul Summers owns shares in Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. 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.

Go large

If I were new to investing, I’d stick to buying shares in big companies. This might mean only picking stocks from the FTSE 100 index — the Premier League of the UK market.

One benefit of larger company stocks is that they’re highly liquid. In other words, there’s usually a buyer for every seller. In practice, this means I should always be able to sell if I want to (although doing so in a panic should be avoided). Contrast this with smaller companies where it can sometimes be a struggle to find a buyer at a good price. Thanks to their clout and financial stability, larger companies can also ride out inevitable periods of poor trading.

Having said this, the size of a business matters little if I don’t understand it. This brings me to my second point. 

Know the company

As an investor, I must know how a business makes its money. Otherwise it becomes harder to predict whether it can do well in the future. Being a customer helps.

Two great examples of this are drinks giant Diageo and consumer goods firm Unilever. I know the former owns some of the most recognisable brands consumed in my local pub, such as Smirnoff and Guinness. The latter’s products are in most kitchens and bathrooms. US tech stocks like Amazon and Apple also fit the bill and are potentially worthy of inclusion in a new investor’s portfolio in time.

There’s nothing especially complicated going on here. If I’m struggling to appreciate the basic business plan, it’s not for me.

Be Defensive

Defensive companies sell products or services that are in fairly constant demand. This predictability makes them the best stocks to buy for beginners, in my view.

For me, this would include supermarket giant Tesco. After all, everyone needs to eat. Moreover, a quick web search confirms that Tesco is the clear market leader. 

In fact, all the companies already mentioned strike me as pretty defensive. I know I’ll continue buying Marmite (Unilever), most probably from Tesco. I’ll also continue to order stuff through Amazon and make calls using my iPhone.

Put another way, defensive companies are not the sort I might read about on Reddit. These ‘meme stocks’ just don’t have the solid fundamentals to back up their big price gains, making them very volatile.

For me, the best stocks to buy for beginners are those that get on with things without much fanfare. 

But do I actually need to pick stocks?

Some people simply don’t have the time to fully research businesses, so stock-picking isn’t essential. On top of this, investing in even the biggest and best-known stocks is never risk-free. As the 2020 market meltdown showed, most share prices fall when negative global events occur.

If I’m put off by either of the above, allowing a professional (or computer) to invest on my behalf may be more appropriate. Accordingly, some beginners might be better suited owning a bunch of active and passive funds rather than single company stocks.

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Paul Summers has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Apple. The Motley Fool UK has recommended Diageo, Tesco, and Unilever and has recommended the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. 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.

The best approach, in my view, is to spread your money over a number of different well-established, blue-chip companies that have great track records and attractive growth prospects. With that in mind, here’s a look at two FTSE 100 shares that I believe are well suited to beginners.

A great stock to start with 

If you’re a beginner investor, Unilever (LSE: ULVR) is the perfect stock to buy, in my opinion. It’s a leading consumer goods company that owns a wide range of well-known brands. The chances are, you use some Unilever products yourself. Dove, Persil, PG tips, Domestos, and Radox are just some of its brands.

One reason I think Unilever is well suited to beginners is that it’s a lower-risk stock. No matter what’s happening in the global economy, people buy its products. This means that its earnings are quite consistent. As a result, ULVR shares often fall less than the wider market when the stock market is volatile. When the FTSE 100 index fell nearly 35% due to Covid-19 in February and March, for example, ULVR shares only fell about 20%.

I also like the fact that Unilever has an excellent track record in terms of generating shareholder wealth. Not only have investors done very well from the rise in its share price over the years (the stock is up over 150% in 10 years) but they have also picked up plenty of dividends along the way. The dividend yield on the stock is currently about 3.2%.

Unilever shares currently trade on a forward-looking P/E ratio of about 21.7. I think that’s good value.

A lower-risk FTSE 100 share 

Another FTSE 100 share that I believe is well suited to beginners is Diageo (LSE: DGE). It’s a leading alcoholic beverages company that owns a top portfolio of brands including Johnnie Walker, Smirnoff and Tanqueray.

Like Unilever, Diageo is a lower-risk stock. People buy its alcoholic beverages during both the good times and the bad. This means that earnings are fairly consistent, which translates to less share price volatility.

Diageo does face risks associated with Covid-19, of course. In the short term, earnings are likely to be down due to the fact that so many bars and pubs across the world have been forced to close.

However, the long-term growth story here looks attractive. As wealth continues to rise in emerging markets (where Diageo generates a high proportion of revenues), demand for its brands should rise.

Diageo also has a great track record when it comes to generating shareholder wealth. Not only has the stock delivered fantastic share price gains over the years, but investors have been rewarded with consistent dividends. Currently, the dividend yield is about 2.4%.

Diageo is not the cheapest stock in the FTSE 100. Currently, the shares trade on a forward-looking P/E ratio of about 23.9. However, this is a high-quality company. So, I think it deserves a premium to the market.

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Edward Sheldon owns shares in Unilever and Diageo. The Motley Fool UK has recommended Diageo and Unilever. 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.

Register with an online broker

The first thing I’d do is open an account with an online broker. I’d go with the largest in the UK, Hargreaves Lansdown (full disclosure: I’m a Hargreaves Lansdown shareholder).

The reason I like it is that its platform is extremely user-friendly. I’ve found it to be more reliable than the platforms that other brokers offer (when I was with another well-known broker, there were times I couldn’t even log in as the system was down). In addition, Hargreaves’ customer service is brilliant. It’s not the cheapest broker in the UK, but as with most things in life, I think you get what you pay for.

Protect my profits

The next thing I’d do is open a Stocks and Shares ISA. This is a flexible account (you can access your money at any time) that enables you to invest in a wide variety of assets including stocks, funds, investment trusts, and ETFs.

The main benefit of investing money within a Stocks and Shares ISA is that all capital gains and dividend income are completely tax-free. That might not seem like a big deal when you’re only investing £500, but as your portfolio grows in size, protecting your gains becomes very important. The more you can protect your wealth from the taxman, the better.

Invest in a fund

Finally, I’d put my £500 into an investment fund within the Stocks and Shares ISA. With funds, your money is pooled together with the money of other investors and managed by a professional fund manager.

The main benefit of investing in a fund, as opposed to buying an individual stock, is that your money is spread over a number of different companies. This reduces your overall portfolio risk significantly. It’s also more cost-effective compared to buying individual stocks if you’re only investing a small amount of money.

As for which fund I’d choose, I’d go with the highly popular Fundsmith Equity. This is a global equity vehicle that has exposure to leading companies listed both in the UK and internationally, such as Unilever, Diageo, Microsoft and PayPal. Managed by Terry Smith, it has an incredible long-term track record – between 1 November 2010 and 31 December 2019, it returned 364% versus 180% for its benchmark, the MSCI World index (past performance is no guarantee of future performance of course).

Once invested, I’d hold for the long term and regularly add to the fund when I had more money to invest. Once my account size was larger, I’d look to diversify my fund holdings and potentially introduce some individual stocks into the mix in an effort to generate higher returns.

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Edward Sheldon owns shares in Hargreaves Lansdown, Unilever, Diageo, and Microsoft and has a position in Fundsmith Equity. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Microsoft, PayPal Holdings, and Unilever. The Motley Fool UK has recommended Diageo and Hargreaves Lansdown and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. 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.

Having said this, there are a few things all new investors should really try to avoid. 

1. Starting without a solid foundation

Three things need to happen before you buy a single stock, in my opinion.  

First, make sure you’ve completely wiped any high-interest debt. Investing is all very well, but doing so while still carrying debt is the equivalent of taking one step forward and two back. 

Second, have some ‘rainy day’ savings for life’s little emergencies. A few months’ of expenses should be sufficient to get you by. 

Third, open a Stocks and Shares ISA. Fail to do this and you’ll end up handing back a proportion of what you make to the taxman.   

Those who choose to bypass the above will be taking far more risk than necessary before they’ve even get started.

2. Investing everything in one go

As a market newbie, it can be tempting to assume you need to put all your money to work in one fell swoop. 

Thankfully, this isn’t the case. While it’s never a good idea to stay in cash for too long (inflation will gradually erode its value), all major brokers now offer the option of making regular monthly investments. As well as paying less in commission to acquire stock, this strategy also ensures you won’t invest everything at the top of the market.

Not needing to rush is one of the few advantages private investors have over professional money managers who are required to chase performance to keep their jobs. Don’t squander it. 

3. Ignoring diversification

Even the best companies experience setbacks. If you’re going to pick your own stocks from the outset, it’s therefore vital to spread your money around.

This usually means buying stocks in different industries (such as housebuilders, retailers, pharmaceuticals) but it could also be applied to the size of businesses (not too many small-caps). Moreover, it’s a good idea to buy firms that aren’t too dependent on trading in just one part of the world. 

How many stocks is enough? Research suggests roughly 20-25 should give you all the diversification you need.

4. Buying what’s popular

Another rookie error is to only buy those stocks that have had a good run in the last few weeks or months. 

While it can be very profitable, the issue with this approach — known as ‘momentum investing’ — is that momentum can disappear very quickly, causing share prices to fall. This is usually exacerbated in popular stocks as they tend to have very rich valuations.

If you must buy something hot, try balancing it out with something that offers value and/or income. 

5. Not being bothered

The rationale behind stock picking is very simple: we buy shares in the hope of selling them on for a higher price. In reality, it requires effort, patience and the ability to keep emotions in check.

If you suspect that your commitment to researching companies and monitoring their performance may last about as long as your 2020 gym subscription, it may be best to avoid buying individual stocks and put money in cheap, market-tracking funds instead.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Despite what some may think, it’s also easy to do. The five steps outlined below should be enough to get you on your way. 

1. Know yourself

Admittedly, this isn’t the most exciting step, but nor should it be. Before putting a penny of your money to work in the market, it’s vital to know your reasons for doing so. This can have a huge impact on what, exactly, you choose to invest in. 

The only ‘rule’ to abide by when setting goals is that they are sufficiently long term, such as saving for retirement, a child’s university fees or perhaps a house deposit. If you’ll need access to your money in less than, say, five years, you risk getting back less than you put in because market movements — over the short term — are unpredictable.

2. Get an ISA

Opening a Stocks and Shares ISA takes very little time but it’s a brilliant thing to do.

If you make an investment and that investment does well, you’ll pay capital gains tax on the profits you make. With an ISA, however, you can shield 100% of that profit from the taxman (along with any income you receive in the form of dividends).

This really matters. The more money you retain, the greater the effects of compounding over time, greatly increasing your chances of hitting the goals identified in Step 1.

3. Set up a direct debit

Having set up a tax-efficient account, your next job is to load it with cash. With an ISA, your total allowance is £20,000 for the current tax year. Don’t worry if you can’t find anywhere near this amount — simply deposit whatever you can afford.

You don’t need to invest everything in one go either. Indeed, a way of ensuring you’ll stick to investing (and don’t spend everything you earn) is to set up a direct debit with your bank that guarantees a fixed amount of your money is transferred over to your ISA every month. 

Investing on a regular basis also means you don’t put all your cash to work just before markets crash. 

4. Buy cheap funds

Here at the Fool UK, we like getting down and dirty with individual stocks. This, however, can be rather daunting for someone just starting out. Scrutinising companies also takes time and energy.  

That’s why I think new investors should initially concentrate on buying exchange-traded funds. This is a low-cost strategy that guarantees you to get the market return, rather than attempting to beat it. Warren Buffett — generally regarded as the best investor on the planet — thinks the vast majority of people should adopt this approach. 

5. Do nothing

The last step is arguably the most difficult of all. In an age of 24/7 news and Twitter rants, it can be easy to assume you should be doing something, anything, just to stay ahead.

Don’t be fooled. Counter-intuitive as it sounds, multiple studies have shown that the more inactive you are as an investor, the better your performance is likely to be. One reason among many for this is that costs are kept low.

Get comfortable doing nothing and you’re on the right road for stock market success.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

That said, these days you can get started in the stock market with just a small amount of money. This means you can dip your toes into the water without risking a lot of savings. With that in mind, if you’re keen to start investing but you’re a little bit worried about losing money, here’s how I’d start.

Open an investment account

The first thing I’d do is open an account with a reputable investment provider, such as Hargreaves Lansdown, AJ Bell, or Interactive Investor. These companies enable you to buy a wide range of different stocks and investment funds at a very reasonable cost.

Personally, I use Hargreaves Lansdown as its website and app are both really easy to use and its customer service is brilliant. If you have a question about investing, you can call them and speak to a customer adviser. 

Pick a fund

Next, I’d pick an investment fund to put my money into. The way funds work is that your money is pooled with that of other investors and managed by a professional portfolio manager who spreads the total over many different stocks.

Funds offer investors three main advantages. Firstly, you don’t need to worry about picking stocks yourself, which takes a lot of the stress out of investing. Secondly, they lower your overall investment risk because your money is spread out over many different companies. Thirdly, you can invest in funds with as little as £100 (and you don’t have to pay an upfront trading commission in the same way that you do when you buy individual stocks), meaning they’re ideal for those starting out who only want to invest a little.

I’d choose a ‘global equity’ fund such as Fundsmith Equity or Lindsell Train Global Equity which invest in leading companies all over the world. Both of these funds have excellent long-term performance track records, although past performance is no guarantee of future performance.

Invest a little bit of money

Once I’d chosen a fund, I would then invest a very small amount – perhaps £200 or £500 – and I’d monitor the investment for a few months. This would enable me to get used to the daily fluctuations of the stock market without risking too much money.  

Grow the portfolio

Finally, when I was comfortable with the stock market, I’d invest more and build up my portfolio. Here, I’d start spreading my money over a number of different funds for diversification and look to buy some individual stocks as well, in order to boost my returns. 

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Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. 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.

That said, investing even small amounts does have its challenges. Trading fees and commissions can eat into your returns, so it’s important to invest your money wisely. Here, I’ll look at a few smart strategies when it comes to investing small amounts of money.

Investment funds

One of the most effective ways is to invest in funds. Here, your money is pooled together with those of other investors and managed by a professional fund manager who will diversify the total pool over many different stocks. Funds offer a number of advantages over buying individual stocks if you only have small amounts to invest.

Firstly, up-front commissions are lower. If you want to buy an individual stock, most brokers charge trading commissions of around £10-£12 per transaction. If you only have £200 to invest, a trading commission of £10 means that you’ll be down 5% before you’ve even started.

By contrast, with funds, you’ll generally only pay a small fee in the form of a spread (the difference between the buying price and the selling price) when you buy the fund, and then a small ongoing annual fee (this could be somewhere between 0.5-1.5% per year).

Another advantage funds offer is they increase your diversification. If you only have a small amount to invest, you might only be able to afford to buy one or two individual stocks. Buying this number is a risky approach to investing because if these companies underperform, you may lose money.

To reduce your risk, it’s a good idea to spread your money over many stocks, and this is what funds enable you to do. Even if you just have a few hundred pounds to invest, your money will be spread over many different companies, reducing your risk significantly.

These days, you don’t need much money at all to start investing in funds. For example, through online broker Hargreaves Lansdown, which offers access to a wide range of world-class funds such as the Fundsmith Equity fund and the Lindsell Train Global Equity fund, you can get started with just £100. You can also set up a monthly investment plan from as little as £25.

All things considered, investment funds are generally an excellent option for those who are looking to invest small amounts.

Individual stocks

Of course, if you do want to invest in individual companies, such as Lloyds Bank or Boohoo Group, with a small amount of money, it certainly is possible. However, my advice would be to stockpile your cash until you have a slightly larger amount to invest so it’s more cost-effective.

For example, if you wait until you have £750 to invest in a stock, instead of £200, a £10 trading commission will only represent 1.33% of your capital, which is a far more reasonable transaction cost. Just remember though, owning only one or two stocks is quite risky, so you’ll want to diversify your portfolio as quickly as possible. 

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Edward Sheldon owns shares in Hargreaves Lansdown, Lloyds Bank and Boohoo Group and has positions in the Fundsmith Equity fund and the Lindsell Train Global Equity fund.The Motley Fool UK has recommended boohoo group, Hargreaves Lansdown, and Lloyds Banking Group. 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.

The table below shows the 10 industry heavyweights and their valuations based on forecast 12-month price-to-earnings (P/E) ratios and dividend yields.

Before looking at individual stocks, let’s get a feel for overall value. The table below shows average P/Es and yields for the group as a whole for the last four quarters and seven years.

My rule of thumb is that an average P/E below 10 is bargain territory, 10-14 is good value, and above 14 starts to move towards expensive. As you can see, the P/E is little changed from last quarter and remains in my good-value band.

Accountancy software group Sage has by far the highest P/E at 25.5 and lowest yield at 2.2%. Many of my Foolish colleagues remain keen on the company, but I think the valuation is too high. Personally, I’d avoid Sage right now, but be happy to buy the other nine stocks for a FTSE 100 starter portfolio.

Pessimism overdone

British American Tobacco (BAT) is worthy of particular comment, in view of its single-digit P/E of 8.4 and group-leading dividend yield of 7.9%. Two summers ago, it was trading on a P/E of 17.6, with a 3.7% yield. The share price then was 5,234p, compared with 2,749p today.

Remarkably, BAT’s de-rating has come in the face of continuing earnings and dividend growth, and forecasts of 7% increases in both the current year and 2020. It seems investors are worried about the longer-term outlook.

Global volumes of traditional tobacco products are declining, there are uncertainties around how markets for newer products, like e-cigarettes, will evolve, and ongoing regulatory risk casts an ever-present shadow.

However, I think BAT’s P/E and yield reflect far too high a degree of pessimism. As such, I see the stock is attractively cheap.

Disappointing, but …

BAT has overtaken Vodafone at the top of the yield leader board since my April review. This is because the telecoms giant announced a rebasing of its annual dividend (to 9 eurocents from 15.07 eurocents) in its annual results in May. A disappointing, but not unexpected, move to support its balance sheet, with its €18.4bn acquisition of Liberty Global‘s operations in Germany and Eastern Europe expected to complete in the next few weeks.

The current share price of 129p is lower than it’s ever been in any of my quarterly reviews since I started writing these articles in July 2012. This means even the new lowered dividend provides an attractive 6.3% yield for buyers of the shares today. And while the P/E is currently relatively high at 15.2, I expect the strategic and financial benefits of the Liberty Global acquisition to help drive strong earnings growth in the coming years.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended HSBC Holdings, Sage Group, and Tesco. 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.