Beginners' Portfolio: Time To Buy Oil!

Published in Investing on 2 August 2012

Every portfolio should have at least one oil share, right?

This article is the latest in a series that aims to help novice investors with the stock market. To enjoy past articles in the series, please visit our full archive.

I've been convinced that the Motley Fool Beginners' Portfolio needs an oil share in it for some time, but I've been torn between going for a riskier exploration prospect, or one of the big FTSE 100 (UKX) producers.

What's settled it is that I'm really not much of an expert at analysing 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 -- instead we'll be set up for nice juicy dividends over the coming years.

What that means is I'm adding BP (LSE: BP), the fourth biggest company in the FSTE 100 and valued at £84.6bn, to the portfolio.

The deal went like this...


It's not a real money portfolio, but our £500 installment got us a virtual 112 shares at a cost of 434.45p each, for a total of £485.58. The usual commission of £10 plus £2.43 stamp duty brought our spend up to £499.01.

Our total investments are now looking like this...

CompanyBuy priceShare costChargesTotal cost
Vodafone (LSE: VOD)168.5p£487.07£12.44£499.51
Tesco (LSE: TSCO)305.5p£485.80£12.43£498.23
GlaxoSmithKline (LSE: GSK)1,440.5p£489.77£12.45£502.22
Persimmon (LSE: PSN)617.9p£488.11£12.44£500.55
Blinkx (LSE: BLNX)36.94p£487.24£12.44£499.68
Total £2,924.57£74.63£2,999.20

Why BP and not Royal Dutch Shell (LSE: RDSB)? 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 is, we have no way of telling now.

But BP shares seem a bit depressed at the moment, with a $5bn writedown of US 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.

Nice forecasts

Current forecasts put the shares on a prospective price-to-earnings (P/E) ratio for the year to December of 6.7, falling to just 6.5 for 2013, which is less than half of the FTSE 100 long-term average of around 14. And we have forecast dividends of 4.8% followed by 5.4%. 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.

Where now?

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.

Are you looking to profit from this uncertain economy? "10 Steps To Making A Million In The Market" is the very latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- it's free.

More for beginners:

> Alan does not own any shares mentioned in this article. The Motley Fool owns shares in Tesco.

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leapo 03 Aug 2012 , 10:27am

I appreciate that this is a virtual portfolio and in particular, that you are playing with fairy money. However, I think you need to add at least a zero onto your capital and take this into a more "real world" scenario as your purchase of 112 BP would nave actually cost you £4.455 which is a nonsense. You would need the share price to increase by over 2.5% just to cover your purchase cost. If you wanted to sell, then you would be looking at around £4.560 before you broke even, an increase of nearly 5%.

Look, I hate trackers and funds, preferring to invest directly, but in this case, with such a small capital at your disposal, in the "real world" you would be looking at a fund which had the shares you are recommending heavily featured, in order for it to make any sense at all. I worry that novice investors will be mis-led by this piece and it only really makes sense to trade individual blue chips with larger amounts of capital.

SmudgeButt 03 Aug 2012 , 11:47am

I disagree Leapo. A novice would be a fool in dictionary sense to jump into investing with huge chunks of money. If someone is only making their fifth purchase (especially if it's not fairy money) then it is very important to do some tasters to see how buying feels, the process works, that there are no surprises in actually making the purchase.

My very first purchase (outside of trackers or investment clubs) was to fork out the grand sum of £100 to buy 3 different shares. I accepted that the charges (minimal at £1.50 + tax) would eat into the £33/34 purchase price. I also then realised (a little too late obviously!) that selling costs would cut in a severe way. So I think my shares have to pretty much double before I'm in the money. Considering one was RBS it's seems unlikely to happen.

But I have no regrets about this - it taught me a lot about looking at shares, what questions to ask, how to use my sharedealer. When I found myself more money and confidence I was able to increase the size of my purchases. I also knew that when I reached my current situation where I don't have time for the crucial DYOR (do your own research) I need to put my dealing on hold even if I have the cash, and have some really sterling tips on guaranteed rockets.

Oh & I did have one of my tiddler purchases at £33 go balistic and have a buy out at about £88 so I haven't done too badly (yet).

onlyben 03 Aug 2012 , 2:16pm

I also am inclined to disagree with you leapo.

I'm a novice investor, having only started investing 5 weeks ago (and I'm also only 20). Not only is this set of articles informative and reassuring but the portfolio I am building is of a very similar size and based on similar principles.

Recently I said on another post that I was not a fan of paper portfolios. However, this is no ordinary paper portfolio. Mr Oscroft is factoring in every charge when buying his shares and acting like a novice investor whilst being an experienced investor.

You may have misread, but Alan does say that he's decided to purchase this share for its dividend. With this in mind, as long as you believe the current share price is reasonable or below the intrinsic value, the price is quite irrelevant. All he wants is the dividend and as long as the company continues to make money then he will get his dividend.

duffmanchon 05 Aug 2012 , 11:11am

If you hold more than one year the charges become less of a problem. You will still be better off that way than paying 1.65% to Neil woodford when you can just buy his top ten holdings.

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