What to do with $50,000 now: Buy these 10 stocks

What to do with $50,000 now

Low interest rates and the recent stock market surge make this a challenging time to find the best places for your extra cash.
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Buy these 10 stocks

According to Pat Dorsey, director of equity research at Morningstar (and a Money columnist), high-quality blue chips present the best opportunities now. He likes these 10, all of which offer above-average dividends.

Stock: Abbott Labs
Why now? Diversification -- plus few patents set to expire -- equals good prospects for the drugmaker.

Stock: BB&T
Why now? Unlike some other financial firms, this plain-vanilla regional lender has a conservative balance sheet.

Stock: Diageo ADR
Why now? As consumers worldwide resume spending, the owner of brands like Tanqueray and Smirnoff should profit.

Stock: Exxon Mobil
Why now? Its sheer scale, plus great capital-allocation skill, positions the energy giant well.

Stock: Novartis ADR
Why now? Novartis has a top-tier new-drug pipeline plus a good record of returning cash to shareholders.

Stock: Paychex
Why now? This payroll company offers good pricing power and strong margins.

Stock: Philip Morris
Why now? Growth is slowing, but Big Mo still has fat margins and a healthy dividend.

Stock: Realty Income
Why now? This retail landlord offers a high yield combined with consistent, modest income growth.

Stock: Southern Co.
Why now? An electricity producer and distributor, Southern Co. is a reliable juggernaut that's positioned well for growth.

Stock: Sysco
Why now? This strong food-products marketer and distributor delivers high returns on capital.

http://money.cnn.com/galleries/2009/moneymag/0910/gallery.spend_50000.moneymag/6.html

Why Invest in Stocks? An Example in Practice

If you are a newcomer to investing, you may still doubt that you are capable of building a portfolio of stocks that will make you rich.

Not all stocks are going to live up to their early promise, no matter how much time you devote to making a selection.

In the other hand, even if you pick your stocks blindfolded, you will have some winners.

An Example

Investing into Common Stocks

Let's suppose that you want to invest $100,000 in 20 stocks, or $5,000 in each. Some will work out and some won't.

So so news - 10 of 20 stocks will just plug along

Hypothetically, it does not seem unreasonable to project that 10 of these stocks will just plug along, making you neither rich nor poor. Suppose we assume that these 10 stocks will appreciate (rise in value) an average of only 7% per year over the next 10 or 20 years. Toss in a 2% annual dividend and the total return adds up to 9% per year. That is not exactly riches, since stocks over the last 75 years have averaged about 11%.

At any rate, here is what your $50,000 will be worth at the end of:

10 years - $118,368

20 years - $280,221

Good news - 3 of 20 stocks performed above your wildest dreams

Next, let's look at the 3 stocks that performed above your wildest dreams. They appreciated an average of 15% per year. Add in a modest annual dividend of only 1%, and you have a total return of 16%.

Assuming you invest $5,000 in each of these stocks, that $15,000 will be worth over the next:

10 years - $66,172

20 years - $291,911

Bad news - 2 of 20 stocks skid and never recovered

So far, so good. Now, for the bad news. Two of your stocks hit the skids and never recovered. Total results for the $10,000 invested in these losers is: zero

10 years - $00,000

20 years - $00,000

Fair news - 5 of 20 stocks performed about average

Finally, 5 of your 20 stocks do about average. They appreciate an average of 9% per year and I have an average yearly dividend of 2%. That's a total return of 11%. Since you have 5 stocks in this category, your total investment is $25,000. Here is what you end up with in the next:

10 years - $70,986

20 years - $201,558

Adding Up these Returns

If we add up these various results, the final figures make you look reasonably rich:

10 years - $255,525

20 years - $ 773,690

Investing into CDs

By contrast, had you acted in a cowardly manner and invested exclusively in CDs that gave an annual return of 4%, you would have only the following at the end of the two periods:

10 years - $162,889

20 years - $265,330


One final note. If you figure in taxes, you look even better, since the capital gains (on your stocks ) are taxed at a much lower rate than ordinary income (which applies to CDs). And, you wouldn't even have to worry about capital gains on your stocks if you elected not to sell them.


(Comment: My personal guideline is this. Of 5 stocks you buy, expect 1 to do very well, 3 to be average, and 1 to do poorly.)


Read also:
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice

Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?

Why doesn't everyone buy common stocks?

That's a good question. Let try to find some satisfactory answers.

Part of the reason may be ignorance.

Not everyone is willing to investigate the field of common stocks.

These noninvestors may be too preoccupied with their jobs, sports, reading, gardening, travel, or whatever.

Then, there are those who are heavily influenced by family members who have told them that stocks are too speculative and better left to millionaires. (Of course, that's how many of those millionaires become millionaires.)

Even if you are convinced about the potential of stocks, you are probably wondering how anyone can possibly figure out which stocks to buy, since there are tens of thousands to choose from.

That, in essence, is the purpose of all my postings in this blog - to get you excited in pursuing financial education to benefit from your investing into common stocks.


Read also:
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice

Why Invest in Stocks? Some Profitable Comparisons

Based on this study, we can say with confidence that over a lifetime of investing, an investor will reap a total annual return of 10% or more.

If you compare this with the amount you could earn by owning CDs, annuities, government bonds, or any other conservative investment, the difference is considerable.

Let's see how that difference adds up.

Suppose you invested $25,000 in a list of common stocks at the age of 40, and your portfolio built up at a 10% compound annual rate. By the time you reached 65, your common stock nest egg would be worth $270,868.

Now, let's say you had invested your money in government bonds, yielding 6%. The same $25,000 would be worth only $107,297, which is a difference of $163,571. Neither of these calculations has accounted for income taxes or brokerage commissions.

Now, let's look at the timid soul who invested $25,000 in CDs at age 40 and averaged a return of 4%. By age 65, that investment would be worth a paltry $66,646.


Read also:
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice

Why Invest in Stocks? Investing for the Long Term

Investing, however, is not a one-year endeavor.

Most investors start their programs in their 40s and 50s, which means they could be investing over a 20, 30, or 40-year period.


5-year periods

If we look at the relative returns of different investments over 5-year periods - rather than 1-year periods - the results are even more encouraging.

During the years from 1960 through 1994, there were 31 such periods.

In only 2 of 31 of those 5-year periods did the total return of the Standard & Poor's based portfolio become negative.

29 of 31 such 5-year periods gave positive total returns.


10-year periods

Let's move ahead to all 10-year holding periods.

There are 26 in that span.

Exactly 100% worked out profitably.


Average annual total returns

Equally important, the returns to the investor were impressive in all of these 1, 5, and 10-year periods.

For instance, the average annual total return:

• for 1-year periods was 11.1%;
• for 5-year periods, it was 10.5%, and
• for 10-year periods, it was 10.2%.

Based on this study, we can say with confidence that over a lifetime of investing, an investor will reap a total annual return of 10% or more.

If you compare this with the amount you could earn by owning CDs, annuities, government bonds, or any other conservative investment, the difference is considerable.


Read also:
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice

Why Invest in Stocks? Look at the Facts

One persuasive study contends that common stocks will make money for you in most years.

1-year periods

This study, done by the brokerage firm Smith Barney, looked at the 35 one-year periods between 1960 and 1995.

The study computed total return, which adds capital gains and dividends.

Over that span, stocks (as represented by the Standard & Poor's 500 index) performed unsatisfactorily in only 8 of those 35 years.

In other words, you would have been better off in money-market funds during those 8 years.

Common stocks would ahve been more successful in 27 of those 35 years.


(Comment: You can expect to have 1 down year for every 5 years of your investing.)


Read also:
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice

Why Invest in Stocks?

Investing is a complex business.


But, then, so is medicine, engineering, chemistry, geology, law, philosophy, photography, history, accounting - you name it.

In fact, investing is so intimidating that many intelligent individuals avoid it.

Instead, they stash their money in CDs, annuitites, bonds, or mutual funds.

Apparently, they can't face buying common stocks.

This is too bad, because that's precisely where the money is made.

You don't make money every day, every week, or even every year.

But over the long term, you will make the most out of your investment dollars.

Read also:
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice