Editor’s Note: This article is a part of our “Top Grad Stocks 2021” series, where our savvy market analysts recommend their best picks for new graduates’ portfolios. Check out “Money Moves for Recent Grads” for more finance advice and click here to see more stocks for your must-buy list.
It’s that time of year where colleges and universities across the country graduate students who’ve completed their studies. While a stock to buy might not be the first thought that enters a student’s mind as they take their diplomas, evidence suggests the earlier young people start investing, the better off they’ll be in their prime earning years and beyond.
There are countless reasons why this makes sense.
The most important, however, as far as I’m concerned, is time in the market. If you put $1,000 into a single stock at the age of 22, and that stock earns an annual total return of 8% over its lifetime, you would have almost $47,000 if you held that stock for 50 years.
However, if you only bought the stock at the age of 32, your $47,000 shrinks to $21,725 over 40 years. By buying a decade earlier, you’ll wind up with more than double the return at age 72.
The question, then, is which stock to buy? If we’re talking about the typical college graduate, my recommendation would be Apple (NASDAQ:AAPL).
AAPL Stock: A Company Whose Products You Use Everyday
Imagine sitting down with your freshly-minted college graduate son or daughter to discuss stocks to buy. If the first name out of your mouth is IBM (NYSE:IBM), you clearly don’t pay very close attention to your kid’s day-to-day existence.
Most high school and college graduates live on their phones. Either they own an Android device, or they use an iPhone. A UK study I found from Deloitte said that 46% of people aged 18 to 24 said they look at their phones all of the time or very often.
More importantly, as a reason to buy AAPL stock, the iPhone is the most popular smartphone brand, with people 18 to 24 at 43%.
It stands to reason that if you use an iPhone every day, the costs of owning that phone provide zero financial gains, while a significant amount of dollars go out the window to pay for the phone and data usage.
I believe in the concept of paying yourself first.
Only in my version of this time-tested financial planning tool, you’re investing in businesses that make your life a little easier, more organized, or perhaps even more fun.
So, if you’re a college grad and are paying out $75 a month, you will have doled out almost $1,000 for that phone over the course of a year. Over the course of 50 years, you’d be forsaking buying a new luxury automobile.
That’s a lot to give up.
AAPL Stock: The Power of Compounding
If you go to almost any stock broker’s website, there’s usually a small blurb about the power of compounding. You know, where it states that $100 invested at 8% becomes $108, which becomes $108.64, and so on. Add to that reinvested dividends and even a small amount like $1,000 accumulates significantly over five decades.
Using Apple’s past performance, if you bought $1,000 of AAPL stock 15 years ago — it has annualized total return of 30.9% through May 21 — today, you would have $56,767, an almost 57-fold increase in your investment.
Now, multiply that over 50 years, and $56,767 becomes a little more than $703 million. Yes, that’s right, million with an “M.”
Of course, there’s not a chance in Hades that Apple or any stock is going to deliver those kinds of returns for half a century. But it’s nice to dream.
However, if you spend $1,000 a year on your phone, even if you only invest $100 in Apple stock today, and add $10 each year for the next 50, based on a 15% annual return, you would still have $191,369 at the end of that half-decade.
I’d take that every day and twice on Sundays.
If you’re a college graduate, you have plenty to look forward to, including buying and using many of the cool products that Apple will create in the decades to come. Why not benefit by owning a share of the profits it will generate from these products?
In the trailing 12 months, Apple had free cash flow of $90.5 billion. It will use some of this to buy back its shares. Every time it repurchases its shares — the company bought back $43.3 billion of its stock in Q2 2021 — your stake in the company gets a little larger.
I won’t get into why many companies do a bad job repurchasing shares because that’s a subject for another day. However, it couldn’t possibly spend all of its free cash on product development or acquisitions in Apple’s case, making stock repurchases a natural allocation of its capital.
It currently has a share repurchase authorization in place of $315 billion. You can be sure that Warren Buffett, Apple’s third-largest shareholder, hopes the company uses the entire amount. You should be too.
If you’re a recent college grad, I can’t think of a better gift to yourself than ownership of Apple stock. It’s an investment you stick in a drawer for 50 years.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.