3 FTSE 100 stocks I’d buy for a starter portfolio in 2020

G A Chester discusses three FTSE 100 (INDEXFTSE:UKX) stocks with clear drivers for growth in the coming decades.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When I began investing, I was daft enough to buy penny stocks with great ‘stories’ but unproven assets and no cash flows. It was a big mistake. I’d do things very differently if I was starting out today.

My first picks would be proven, cash-generating FTSE 100 businesses, with clear drivers for growth in the coming decades. With this in mind, here are three blue-chips I’d be happy to buy as core holdings for a starter portfolio in 2020.

Defence demand

The current conflict between Iran and the US is a reminder that political, cultural or economic tensions around the world can escalate at any time. But even outside of such worrying times, defence spending remains a key part of any government’s annual budget. As such, I believe defence giant BAE Systems (LSE: BA) is a solid core holding for long-term investors.

In a trading update in November, the company reiterated its guidance for 2019 of mid-single-digit percentage growth in earnings per share (EPS). City analysts are reckoning on a 6.5% rise to 45.7p, and have pencilled in a dividend of 22.9p.

At a share price of 592p, the price-to-earnings (P/E) ratio is 13 and the dividend yield is 3.9%. I think BAE is well-equipped to maintain both its current EPS growth rate and P/E rating over the long term. If so, and taking into account the starting dividend yield, investors would be looking at a nice total return of around 10% a year.

Growth markets

Following the demerger of its M&G UK asset management business last year, Prudential (LSE: PRU) is now an Asia-focused provider of insurance and savings products. Also expanding in Africa, the long-term appeal of the stock is its excellent exposure to what are exciting structural growth markets.

Due to the M&G demerger, we’ll see a reset of Prudential’s EPS from continuing operations (and dividend) when it announces its results for 2019. Analysts expect EPS of 133.3p and a dividend of 40.1p. At a share price of 1,470p, this gives a P/E of 11 and a yield of 2.7%.

EPS annual percentage growth is forecast to run at mid-to-high single digits in the coming years. Again, taking into account the starting yield, there’s an attractive potential annual double-digit total return for investors. However, I think Prudential will also come to rate on a higher P/E than currently, giving an added boost to returns.

Captive customers

Relx (LSE: REL) will probably be a less familiar name to many readers than BAE or Prudential. However, the case for its inclusion in a starter portfolio is just as strong, in my opinion. Its massive databases and analytical tools in legal, scientific, technical and medical fields (among others) are indispensable for its customers. And with information ever expanding, I believe Relx is well-positioned for long-term growth.

City analysts expect the company to report EPS growth of 9.2% to 92.5p for 2019, and to pay a 45.7p dividend. At a share price of 1,930p, the P/E is 20.9 and the yield is 2.4%.

Relx’s many unique assets and captive customers justify the P/E, in my opinion. I reckon it can maintain annual EPS growth at a high single-digit percentage. And with a reasonable starting dividend yield, and the payout likely to grow at the same high rate, I see this as another stock offering potential annual double-digit total returns for investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential and RELX. 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.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »