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======================== THE MOTLEY FOOL ======================== INVESTING BASICS Tuesday, May 22, 2001 benjamin.rogers@enron.com ================================================================= IN THIS ISSUE --------------------- - Q&A: 401(K) MATCHING FUNDS? - Q&A: WHAT HAPPENS TO MY STOCK IF THERE'S A MERGER? - LESSON: DIVIDEND YIELDS ================================================================= SPONSORED BY: Kaplan College Become a Financial Planner! Kaplan College's online Cert. in Financial Planning program prepares you for success in the #1 ranked profession. Invest in your future career today! http://www.lnksrv.com/m.asp?i=413427 ================================================================= YOUR QUESTIONS ANSWERED Q. My company matches a certain percent of my pay, depending on how much I contribute to my 401(k) plan. The matching money goes only into the company employee stock-purchase program, but my own contributions can go into various mutual funds. Shouldn't I at least contribute enough to this 401(k) to get the maximum amount that the company will match? A. You've answered your own question correctly. In most cases, it's definitely smart to take advantage of as much company matching as possible. Let's say that for every $1 you sock away in your 401(k), your employer chips in 50 cents. That's an immediate 50 percent return! It would be extremely difficult to beat that with any investment method. The only time it might not be so great is if the matching money isn't going into something you're comfortable with. If it's going into stock in the company and you're very uncomfortable about the company's future, then perhaps you're getting a 50 percent return that will soon become a 0 percent return. That's an extreme example, though. And even in that case, the money that YOU socked away can be in a safer place, growing. For a 60-second guide to 401(k)s, check out this article. Q. If I own shares of a company and the company is bought out or merges with another company, what happens to my shares? http://www.fool.com/m.asp?i=413428 A. Several things could happen. If the firm is bought out for cash, you might receive a check for your shares. If it's bought with stock or there's a merger involving a stock swap, your shares might be replaced with shares of another company. The number of shares you get will be prescribed by an announced formula. Some deals involve both stock and cash. When a deal you're interested in is announced, track down its press releases for details. P.S. GOT AN INVESTING QUESTION FOR US? Post it on our Ask a Foolish Question message board. http://www.fool.com/m.asp?i=413429 ----------------------------------------------------------------- THIS WEEK'S LESSON DIVIDEND YIELDS A company's "dividend yield" is a valuable concept to understand, but many people scratch their heads when confronted with it. So let us explain. It simply expresses the relationship of two numbers: a stock's price and the amount of its annual dividend. As an example, look at Ford Motor Co. At the time of this writing, it was trading around $51 per share, and paying out $2 per year (in quarterly installments) as a dividend. Take $2 and divide it by $51 and you'll get 0.039. Multiply that by 100 and you've got a dividend yield of 3.9%. This means that if you pay $51 for a share of Ford, you'll earn 3.9% per year on your investment, just from dividends alone. Companies rarely decrease or eliminate their dividends, as that would make investors unhappy. But, dividends of solid companies do tend to rise over time, delivering more value to shareholders. Every now and then, a company will announce an increase. If, in 20 years, Ford's dividend is $8, that would represent a 15.7% dividend yield on those shares you bought for $51. You'd be earning a 15.7% return each year, just from dividends. There would probably be some stock price appreciation on top of that, as well. Note that, for months or years at a time, a dividend will hold steady. But, the yield can fluctuate daily. That's because a stock's price fluctuates. As a stock price rises, the dividend yield falls, and vice versa. If Ford shares, for example, suddenly doubled in price to $102, the yield would be halved, to 2% ($2 divided by $102 is 0.02). If Ford stock fell to $30 per share, its yield for those buying it at $30 would be 6.7%. You can find some hefty dividend yields among companies whose stock prices have tumbled. A year or two ago, for example, R. J. Reynolds Tobacco Holdings paid about $3.00 per share in annual dividends. With its stock trading around $30 per share, that was a whopping 10% dividend yield! Be careful, though. If you're attracted to an unusually high dividend yield, you should probably study the company extra carefully to make sure it's not in so much trouble that a dividend cut is around the corner. Lastly, know that not all companies pay dividends. Younger or quickly growing companies in particular, such as Microsoft or Amgen, prefer to plow extra cash back into operations. ================================================================= SPONSORED BY: Kaplan College Become a Financial Planner! Kaplan College's online Cert. in Financial Planning program prepares you for success in the #1 ranked profession. Invest in your future career today! http://www.lnksrv.com/m.asp?i=413430 ================================================================= My Portfolio: http://www.fool.com/m.asp?i=413431 My Discussion Boards: http://www.fool.com/m.asp?i=413432 My Fool: http://www.fool.com/m.asp?i=413433 Fool.com Home: http://www.fool.com/m.asp?i=413434 My Email Settings: http://www.fool.com/m.asp?i=413435 FAST AND FREE Grab your new Member Benefits and check out what's new for you this week. http://www.fool.com/m.asp?i=413436 FOOL DIRECT EMAIL SERVICES Unsubscribe, change your settings, temporarily suspend mail delivery: http://www.fool.com/community/freemail/freemaillogin.asp?email=benjamin.rogers@enron.com EMAIL DISCUSSION BOARD Let us know what you think of our email products: http://www.fool.com/m.asp?i=413437 _________________________________________________________________ © Copyright 2001, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. MsgId: msg-22832-2001-05-22_14-16-06-5136664_5_Plain_MessageAddress.msg-14:36:34(5-22-2001) X-Version: mailer-sender-master,v 1.84 X-Version: mailer-sender-daemon,v 1.84 Message-Recipient: benjamin.rogers@enron.com
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