Beginners' Portfolio: Time to Buy Oil!
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LONDON -- I've been convinced that The Motley Fool Beginner's Portfolio needs an oil share in it for some time, but I've been torn between a riskier exploration prospect and one of the big FTSE 100 producers.
What has settled it is that I'm really not much of an expert at analyzing the oil exploration business, and a key part of Foolish investing is to avoid buying things you don't understand. So maybe we'll miss some oil strike booms, but we'll also avoid dry-well disasters -- and instead, we'll be set up for nice juicy dividends over the coming years.
What this means is that I'm adding BP (ISE: BP.L) , the fourth-biggest company in the FSTE 100 with its market cap of 84.6 billion pounds, to the portfolio.
The deal went like this.
It's not a real-money portfolio, but our 500 pound installment got us a virtual 112 shares at a cost of 434.45 pence each for a total of 485.58 pounds. The usual commission of 10 pounds, plus 2.43 pound stamp duty, brought our cost up to 499.01 pounds.
Our total investments are now looking like this:
Buy Price (pence)
Share Cost (pounds)
Total Cost (pounds)
Why BP and not Royal Dutch Shell (ISE: RDSB.L) ? Well, to be honest, I don't think there will be much difference in the performance over the next couple of decades -- or, at least if there will, we have no way of telling now.
But BP shares seem a bit depressed at the moment, with a $5 billion writedown of U.S. assets announced this week, and though we're in this for the long run, there's nothing wrong with taking advantage of short-term weakness when we see it.
Current forecasts put the shares on a prospective price-to-earnings ratio of 6.7 for the year to December, falling to just 6.5 for 2013 -- less than half the FTSE 100 long-term average of about 14. And we have forecast dividends of 4.8% and 5.4%, respectively. Both of those are better than Shell's equivalents.
There could still be more costs from the Gulf of Mexico disaster to come, but everyone knows that, and the uncertainty is already factored into the share price. I'm happy to tuck these away, take the dividends, and hope for some share price appreciation over the next few years as a bonus.
What's next for the beginners' portfolio? Probably a pause for a recap and a look at what's been happening to the shares we've bought so far. I've been following an approach of "strategic ignorance" so far and taking no notice of where their prices have been going in the short term.
Finally, if you want to follow the strategy of buying strong dividend-paying companies like BP, Neil Woodford is an acknowledged expert on it. The free Motley Fool report "8 Shares Held By Britain's Super Investor" takes a look at some of his major holdings. Click here to get your free copy while it's still available.
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The article Beginners' Portfolio: Time to Buy Oil! originally appeared on Fool.com.Alan does not own any shares mentioned in this article. The Motley Fool owns shares of Tesco.Motley Fool newsletter serviceshave recommended buying shares of Vodafone Group. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.