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.
