My favourite stock pick for a beginner’s portfolio

The stock market can seem like an overwhelming place when you’re considering your first investment. Where do you start? What should you invest in?

Analysis paralysis can set in and you end up putting it off. Delaying is the worst thing you could do, as it gives your money less time to compound.

Perhaps a good place to start is by investing in a company that will make the investing decisions for you. Australian Foundation Investment Company Co. Ltd. (ASX: AFI) (AFIC) is the largest listed investment company (LIC) on the ASX with a market capitalisation of $6.5 billion.

AFIC has been around since 1928 and invests for the medium to long term. The ability to invest for a long term outcome provides stability, whereas investment managers trying to have a great quarter every quarter could make bad long-term decisions. This has allowed AFIC to produce an average return per year of 10.7% over the last five years.

The biggest six investments in its portfolio at 31 October 2016 were:

Commonwealth Bank of Australia (ASX: CBA) $579.8 million

Westpac Banking Corp (ASX: WBC) $473.7 million

BHP Billiton Limited (ASX: BHP) $322.8 million

National Australia Bank Ltd. (ASX: NAB) $279.7 million

Wesfarmers Ltd (ASX: WES) $275.7 million

Telstra Corporation Ltd (ASX: TLS) $261.2 million

Everyone has heard of these companies, even if you know nothing about investing. But they’re companies that will likely be around for decades to come. Of course, these all pay big fully franked dividends too – great for investors looking for income.

One of AFIC’s stated objectives is to increase its dividends faster than inflation over the long term. Shareholders can collect a good, reliable dividend throughout this time. Even better, returns can be compounded if you re-invest the dividends.

It hasn’t decreased its normal half yearly dividend since 2001 and it paid consistent dividends throughout the GFC. Of course, it helped that our big banks remained very profitable during this time as these are the biggest holdings in AFIC’s portfolio.

AFIC increased its dividend by 1 cent per share during FY16, which represented a 4.3% increase on the prior year. It’s currently trading with a grossed up dividend yield of 5.98%, which is great in this era of low interest rates.

Foolish takeaway

The stock market can be a confusing world for a beginner investor. In my opinion, a listed investment company like AFIC is a great place to start because of its good returns over various time periods, its reliable dividends and long term focus on investments.

We've just released our #1 dividend pick for 2017. And the winner is...

With its shares up 155% in just the last five years, this 'under the radar' consumer favourite is both a hot growth stock AND our expert's #1 dividend pick for 2017. Now we're pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is click the link below!

Simply click here to receive your copy of our brand-new FREE report, "The Motley Fool's Top Dividend Stock for 2017."

Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.