The best way to start investing is to be boring, buying companies that achieve steady returns after year without having to risk your hard-earned money on high-risk, often low-reward speculative stocks.
This strategy may not appeal to every investor who is just getting involved in the stock market, but by following it, you will get your investment career off to a solid start.
To such ‘fortress’ businesses that have achieved steady returns for investors year after year are Berendsen (LSE: BRSN) and Reckitt Benckiser (LSE: RB), both of which are great stocks for a starter portfolio.
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Fallen on hard times
Berendsen may have fallen on hard times recently, but over the past five years the company has gone from strength to strength. Between year-end 2011 and mid-2016 shares in the company produced a return of more than 200% for investors, excluding dividends. Including dividends, the total return is closer to 220%. And despite the company’s recent stumble, I believe Berendsen can regain its composure and return to growth.
Berendsen is essentially a laundry business, providing outsourced workwear services to 80,000 customers across Europe. This business isn’t glamorous but it sure is steady, and the company is unlikely to experience a sudden collapse in demand for the services overnight. Last year’s profit warning was caused by higher-than-expected costs in UK Flat Linen, which serves the hotel and healthcare industries. The company has acted quickly to reduce these costs and also streamline its processes in the division.
City analysts are optimistic about these changes and expect the group to return to growth next year, with earnings per share set to tick higher by 4% for 2018 following a decline of 8% for 2017.
At the time of writing shares in the company support a dividend yield of 4% and trade at a forward P/E of 14.4. The payout is covered nearly twice by earnings per share.
The most defensive company
Reckitt Benckiser is one of the most defensive companies trading on the UK market today. The producer of baby food and cleaning products has an impressive growth record behind it, and as the world’s population continues to grow, sales should continue to expand.
Over the past five years, sales have increased by around a third, excluding one-off items, and City analysts are forecasting further growth in the years ahead. Specifically, City analysts have pencilled-in earnings per share growth of 10% for 2017 and 5% for 2018. As one of the world’s largest consumer goods companies, demand for Reckitt’s products is unlikely to drop suddenly overnight, and the company’s steady growth is boring but predictable.
Shares in Reckitt currently trade at a forward P/E of 21.2, which is expensive but the shares are worth paying a premium for considering the company’s defensive nature. The shares also support a dividend yield of 2.4% at the time of writing, and the payout is covered twice by earnings per share.
