Investing in the stock market can be an intimidating prospect, especially for beginners with limited capital. However, with the right strategy, even $500 can be turned into a sizable nest egg over time.
In this article, we will look at two stocks that are no-brainer buys for long-term investors with $500 to invest.
The Keys to Long-Term Investing Success
When investing for the long run, the keys are finding quality companies with durable competitive advantages, proven track records, and significant growth potential.
Trying to time the market in the short run is extremely difficult, so a buy and hold strategy focused on great businesses is generally the best approach.
Patience and discipline are also critical. Long-term investing success requires riding out inevitable market downturns and resisting the urge to sell when stock prices decline.
While past performance is no guarantee of future results, high-quality stocks have historically rewarded investors who hold them for decades despite short-term volatility.
With these keys in mind, here are two stocks that are perfect for beginning investors to buy and hold for 20 years with an initial investment of $500.
1. Microsoft
Microsoft (MSFT) is a technology leader and pioneer that has reinvented itself under CEO Satya Nadella to be at the forefront of major growth trends like cloud computing, artificial intelligence, and the Internet of Things.
Microsoft Azure is now the second-largest cloud platform behind Amazon Web Services, and continues to gain market share. At the same time, the company’s Office suite still dominates productivity software.
Microsoft enjoys tremendous competitive advantages, including network effects from Windows and Office, high customer switching costs, and enormous economies of scale.
It generates over $60 billion in annual free cash flow, giving it tons of capital to invest in new technologies and acquire complementary businesses. Microsoft’s balance sheet is rock solid, with $130 billion in cash versus just $60 billion in debt.
Given Microsoft’s dominance in enterprise software and massive opportunity in the cloud, it should continue growing earnings at a mid-teens rate for years to come. The stock trades for a reasonable 27 times forward earnings. MSFT would make a smart, safe long-term investment today.
2. Costco
Costco (COST) is the leading membership warehouse retailer. It operates over 800 warehouses worldwide that serve over 100 million members. Costco’s business model is based on generating most of its profits from annual membership fees. This gives the company tremendous scale and also results in high customer retention rates.
Costco offers members very low prices on a limited selection of essential goods and services, including household items, groceries, appliances, clothing, tires, and pharmaceuticals.
It has significant buying power over suppliers given its scale, allowing it to pass on savings to customers and drive more renewal revenue. Costco manages costs tightly and targets producer margins on merchandise sales. As a result, it generates stellar returns on invested capital above 15%.
The company still has ample room for growth, with over 3,000 additional locations possible just in the U.S. Internationally, Costco is also successfully expanding in countries like Canada, Korea, and China.
Steady mid-single digit comparable sales growth, new store openings, and high membership renewal rates should drive earnings higher at a 8-10% annual clip going forward.
The stock trades around 35 times earnings, which is deserved given the quality of the business. Costco is a best-in-class retail operator and would make an excellent buy-and-hold investment.
Key Takeaways
An initial $500 investment could be allocated between Microsoft and Costco at roughly a 60/40 split to provide broad diversification between the technology and consumer staples sectors.
Holding these stocks for 20 years and reinvesting the dividends could generate over 10 times the original investment amount based on historical returns and continued business growth.
Microsoft and Costco represent rock-solid businesses with durable competitive advantages, history of dividend growth, and substantial growth runways.
They are positioned to continue growing earnings and outperforming the market over the next two decades.
For investors with the patience and discipline to hold high-quality stocks for the long run, buying Microsoft and Costco would be a no-brainer move with $500 today.