I got started in the stock market by making investments of £500 per time. And I think you can too.
In this article I’ll explain how I’d go about investing this sum with the aim of building a future nest egg and income stream.
How I chose my picks
Although £500 is a hefty sum of money, in stock market terms it’s a relatively small amount. This means that charges such as dealing costs can be significant. For example, a typical £10 dealing fee will cost you 2% of your total investment. Stamp duty will add another 0.5%, so before you’ve even started you might be down by 2.5%.
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If you want to sell the shares in the future, then of course you’ll have another £10 dealing fee. That could take your total costs to 4.5%, excluding any dealing ‘spread’.
This is one reason why I aim to buy dividend stocks I can hold for a very long time, without selling. By doing this I can enjoy a regular stream of cash dividends while minimising my dealing costs. If this cash isn’t needed, then I funnel it into new share purchases to help build my portfolio.
Cheap quality
My first pick is FTSE 100 pension and savings firm Legal & General Group (LSE: LGEN). Like many financial stocks, investors are hesitant about this business at the moment due to wider market uncertainty.
But Legal & General has been a consistently strong performer in recent years, with an average return on equity of nearly 20% over the last five years. That’s an impressive figure, which has helped the group to achieve strong cash generation.
Much of this spare cash is returned to shareholders. The group’s dividend is now nearly three times higher than it was in 2007, before the financial crisis took hold.
Analysts expect the firm to pay a dividend of 17.5p per share for 2019, giving the shares a forecast yield of 6.2%. In my view that’s a very attractive level of income from such as large and conservative business.
I think Legal & General stock is probably cheap at current levels. For investors building a new portfolio, I think this could be an ideal buy-and-hold stock.
Big oil, big dividends
My next pick is oil and gas giant Royal Dutch Shell (LSE: RDSB). A growing number of investors are avoiding fossil fuel companies at the moment for environmental reasons. However, I’m fairly sure that the fuels produced by companies like Shell will remain in demand for decades to come.
The company isn’t blind to the risks it faces and is gradually positioning itself for a move away from oil towards gas and alternatives. But for now, it remains consistently profitable and generates a lot of cash.
An impressive amount of this spare cash is returned to shareholders. Since 2017, Shell has bought back more than $12bn of its own shares. And the dividend payout is currently about $15bn each year.
Oil market weakness and investor sentiment have pushed the Shell share price lower recently. The stock now trades on just 12 times earnings, with a 6.5% dividend yield – a payout that’s not been cut since World War II.
In my view, this is a great opportunity to buy into a classic high-yield income stock at an attractive price.
