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Finding the best shares to buy to get the ball rolling on building out a winning portfolio can be daunting.
If I was in this situation today, I’d love to buy National Grid (LSE: NG.) and Imperial Brands (LSE: IMB shares. Here’s why.
Supplying power
National Grid is the company that ensures that everyone gets the electricity they need, and it manages the whole grid.
There are a few key reasons I view National Grid as a great starter stock, as well as one I’d buy and hold as a seasoned investor too.
Firstly, the business has a monopoly on its operations, meaning nobody else in the UK manages the electricity grid. This is a positive, as it means it has no competition.
Next, the business has defensive characteristics. This basically means demand for its products, in this case electricity, will remain robust no matter the economic outlook. After all, no matter what’s happening, everyone needs power. This can help keep earnings and investor returns stable too.
Finally, the fundamentals look good, if you ask me. Here I’m referring to the valuation and rate of return on offer. The shares trade on a price-to-earnings ratio of just 11 and offer a dividend yield of over 6%. However, it’s worth noting that dividends are never guaranteed.
From a bearish view, the biggest issue for me is potential government intervention to curb payouts to investors due to the firm’s monopoly. The other is the fact that moving away from traditional fossil fuels for energy will require hefty investment. Spending money in this area could hurt the share price, and impact returns.
Smokers’ corner
No points on offer for guessing what Imperial does as the name gives away the game. It is one of the largest tobacco businesses in the world with a good track record of dividends. In fact, it’s what is known as a Dividend Aristocrat.
You might be wondering why I’d buy a tobacco stock at present, when the world, including global governments, are pushing an anti-smoking agenda. For me, the threat of regulatory changes and bans are very real, but I can think of a couple of reasons that I can easily counteract that argument with.
To start with, changing regulations and law changes aren’t overnight changes. These types of laws could take lots of years, even decades, to enact.
Next, firms like Imperial have recognised the need to change, and their new non-tobacco alternatives seem to be faring well, boosting earnings, and keeping the returns flowing. However, I will keep an eye on the issues mentioned as real risks.
Imperial’s track record and passive income opportunity through dividends is too hard to ignore. The shares offer a dividend yield of 7.2%. Plus, the shares are cheap as many investors have turned away from them due to the ill-effects that smoking has on health. They currently trade on a price-to-earnings ratio of just eight.
For me, there is still plenty of time and opportunity to make the most of bagging dividends and kick-starting a portfolio with Imperial Tobacco shares.
