Every investor had to get started somewhere. The process can be intimidating, and as the market's performance so far in 2022 reminds us, it's quite possible for stocks to go down as well as up. That makes it even tougher for those who haven't yet taken the leap of faith it takes to put hard-earned cash at risk in the market in the hopes of stronger future returns. Still, even with the market's recent trends, it's hard to argue against the long-term wealth-building potential that stocks have.
With those perspectives in mind, we asked three experienced investors to make a selection appropriate for new investors to consider. They picked Starbucks (SBUX -0.65%), McDonald's (MCD -0.15%), and theVanguard Total Stock Market Index ETF (VTI 0.70%). Read on to find out why and decide for yourself if any of them might be worth using to take those all-important first steps on the lifetime journey of investing.
A company with a straightforward business that commands a premium price
Eric Volkman (Starbucks): For me, a good beginner stock should be a company familiar to investors, ideally to the general public too. Its business should be more or less easy to understand. Plus, as with any worthwhile investment, the company behind it should be profitable and have solid potential for growth. Finally, it doesn't hurt if that company reliably pumps out a dividend.
Starbucks is a company that satisfies all these criteria. With years of aggressive expansion behind it, the company is nearly ubiquitous in almost any American municipality of any size, and also has a presence in select markets abroad.
The company's single-minded mission in life is to sell coffee (and, to a lesser extent, other beverages, food, and snacks). Its business strategy is to keep expanding in order to sell more coffee. How's that for an easy-to-grasp business profile?
People just can't get enough Starbucks. Even on a casual visit during off-peak hours to most of the company's stores, it's likely you'll encounter at least one regular customer. Lines at Starbucks in airports and train stations often rival the ones at the check-in counter or ticket window.
That high demand and the company's ever-increasing footprint have put some real caffeinated zip into the fundamentals. Despite a hiccup in its fiscal 2020 due to the coronavirus pandemic, annual revenue has been on a determined march higher, from just under $22.4 billion in fiscal 2017 to more than $29 billion four years later.
Profitability is choppier but it's usually strong regardless; in fiscal 2021 it was almost $4.2 billion, for example. Starbucks even managed to squeeze out a few bucks in that COVID-weakened 2020, earning $928 million on the bottom line. Over this and next year, meanwhile, analysts are collectively expecting further growth in both revenue and net profit.
And there's that shareholder dividend. Starbucks currently pays $1.96 per share annually, for a not-bad yield of 2.5%.
Starbucks is a fine entry stock for investors, indeed. It's not only a convenient spot to get your morning java fix.
McDonald's has a long history of excellent performance
Parkev Tatevosian (McDonald's): One of my top stocks for new investors to buy is McDonald's. The international fast-food chain is coming out of the pandemic reinvigorated. Revenue and profits are soaring, while adjustments made during the pandemic could sustain those increases for several years more.
McDonald's struggled at the pandemic's onset when government restrictions forced it to disallow guests from dining inside. As a result, revenue fell by 10% in 2020. Management skillfully adapted to the new operating conditions by emphasizing digital sales. Customer orders for delivery, pickup, and drive-thru exploded, and McDonald's revenue bounced higher by 21% in 2021.
The expanding revenue flowed to the bottom line as McDonald's reported a record $10.04 in earnings per share in 2021. That was a whopping 59% increase from the year before. Fortunately for potential investors, these changes could be long-lasting. McDonald's newly formed delivery capabilities expand the reach of each McDonald's restaurant. It could also increase the frequency of customer purchases. Whereas a customer may have previously only purchased McDonald's on their commute to work, they might add a weekend delivery order to the mix.
MCD PE Ratio data by YCharts
McDonald's low-cost menu items could also attract more customers as inflation forces households to prioritize getting more bang for their buck. The good news is that new investors can buy this excellent stock at a fair price-to-earnings ratio of 26.7. That's roughly the average price McDonald's has sold for in the previous five years.
A simple way to get stock market returns
Chuck Saletta (Vanguard Total Stock Market Index ETF): One of the best strategies for beginning investors is also one of the simplest: Buy an index fund. Over the long haul, you will get returns that come very close to the underlying index, less a very modest fee. In the case of the Vanguard Total Stock Market Index ETF, that fee is a virtually invisible 0.03%.
The beauty of this approach is that over the long haul, index investing quite frequently beats funds managed by Wall Street's best and brightest. Indeed, Warren Buffett famously won a $1 million bet by betting that a simple index fund would outperform a basket of hand-picked hedge funds over the course of a decade.
When it comes to the Vanguard Total Stock Market Index ETF, the fund invests in a sampling that covers virtually every investible U.S.-based company. Or in other words, it aims to pretty much match the overall market of American businesses. So if you're looking for a simple way to get returns virtually identical to the total American stock market, this provides a great opportunity to do just that.
While nobody can guarantee what the market's total returns will be, the fees that professional fund managers charge make it likely that over time and on average, those pros will lose to index funds. Sure, if you put in the effort, uncover companies with incredible prospects, and diversify your holdings appropriately, you've got a chance of beating the market by picking stocks on your own. For a person who's new to investing, however, it's really hard to beat an index fund like this one.
Get started now
Whether you want your first investment to be a well-recognized everyday business like Starbucks or McDonald's, or you want to take the straightforward indexing approach to virtually market-matching returns, it's important to take that first step to becoming an investor. Even if your first investment doesn't work out, learning the process and becoming comfortable owning shares of businesses can get you on a long-term wealth-building path. So make today the day you put your plan in place to start investing for your future.
Chuck Saletta has no position in any of the stocks mentioned. Eric Volkman has no position in any of the stocks mentioned. Parkev Tatevosian has positions in Starbucks. The Motley Fool has positions in and recommends Starbucks and Vanguard Total Stock Market ETF. The Motley Fool recommends the following options: short July 2022 $85 calls on Starbucks. The Motley Fool has a disclosure policy.
