An attraction of the stock market for me is that one doesn't have to have a lot of capital to start investing. There are top UK stocks available for just a few pounds that I would happily add to my portfolio today. If I had GBP1,500, here is how I would go about investing it.
Focus on quality
With just GBP1,500 to invest, I'd want to reduce my risks.
I could spread the money across several different companies, but that still leaves me quite exposed to any unexpected downturn in a given share. Rather than speculate on potentially lucrative but very risky companies, I'd be willing to settle for lower returns and hopefully lower risk. Of course, all shares carry some risk, but some more than others.
So I would focus on large, well-established companies with what I think are healthy business prospects in future. I'd also choose top UK stocks and look for income more than capital growth. My reason for that is that if I could generate income, I would get more cash that I could use to reinvest.
So my initial GBP1,500 would hopefully start to grow.
Top UK stocks for dividends: BAT
Using that approach, I've picked three dividend paying stocks. I would spend GBP500 on each. First would be British American Tobacco.
The tobacco behemoth owns iconic brands such as Lucky Strike. Cigarettes are highly cash generative, which enables BAT to pay a yield of 7.8%. The company has raised its dividend annually for over two decades.
However, one of the risks to the dividend is the company's debt pile. Adjusted net debt stood at over GBP40bn at the end of June. I was pleased to see that that was 8.5% lower than a year before but still think it is high.
Cigarette use is declining in many markets, but the company's revenues in the first half slid less than 1%. Stripping out exchange rate impact, the revenue actually grew 8.1%, which I regard as a strong performance even among top UK stocks.
Financial services dividend choice
My second share would be Legal & General. With a yield of 6.5%, the insurer and financial services provider would hopefully provide me with passive income in years to come.
Legal & General has a well-known, long-established brand that I think will help it attract and retain customers. Its business is profitable, with its interim results released today showing a 14% jump in operating profit for the first half, to GBP1.1bn. The increase in the interim dividend was smaller, at 5%, but I still find that attractive.
One risk with Legal & General is the cyclical nature of insurance. Should competitors reduce premiums to attract customers, that could lead to lower revenue at Legal & General if customers move over.
Top UK stocks among utilities
Among top UK stocks, like many investors I consider utilities. My third pick for the final GBP500 would be National Grid.
I would buy the energy distributor for my portfolio for two reasons. First, I think its position and installed infrastructure gives it a strong business moat any competitor would struggle to replicate. Secondly, I like its yield of 5.3%.
One risk I would consider here, though, is changing patterns of electricity usage. That could require substantial capital expenditure in future to keep the distribution network up to date.
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Christopher Ruane owns shares of British American Tobacco.
The Motley Fool UK has recommended British American Tobacco and National Grid.
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.