staugustine.com: the oldest city's home on the Net

Published Saturday, March 28, 2009


Why No Dividends?

Q: Why is it that some companies pay no dividends? How can they attract investors with that approach? -- F.W., Tampa, Fla.

A: Companies can do several things with the money they make, such as reinvesting it in the business, paying it out to shareholders as a dividend, paying down debt and buying back shares (reducing the number of shares outstanding, thereby making each remaining share worth more).

Some firms -- such as smaller, less-established or faster-growing ones -- often need all the cash they generate in order to grow. Yahoo! and Genentech, for example, still pay no dividend, while Microsoft started paying one only in 2003. This is OK. Dividends are attractive because they offer a relatively reliable income that tends to increase over time if the company remains healthy. (Troubled companies may reduce or eliminate their payouts, as General Motors and Citigroup have done.) But strong, growing firms with meager or no dividends can still reward you well, as their stock prices advance.

While some investors seek the stability of hefty dividends payers, others seek more aggressive growers. A combination can work well, too.

Q: How many mutual funds are there, and how many are stock funds? -- R.B., Davenport, Iowa

A: According to recent data from the Investment Company Institute, there are about 8,000 mutual funds in existence, roughly 4,800 of which are stock funds. That's down from more than 9,000 and 5,000, respectively, a few years ago. Bond funds number nearly 2,000 and money market funds about 800. With so many choices, it can be hard to find outstanding funds. For help with that, click over to www.fool.com/mutualfunds/mutualfunds.htm or www.morningstar.com.


Short-Term Focus

You know you need to save for retirement by making long-term investments. But are you ignoring another critical need -- short-term savings -- without which you may end up wiped out, perhaps even in bankruptcy?

In order to deal with financial emergencies and to pay for predictable expenses, such as vacations, new cars and weddings, you have two choices:

(1) Save up and earn interest, or

(2) Borrow the money (often via a credit card) and pay interest (at a much higher rate).

Isn't it a no-brainer?

So how much do you need to sock away? It depends. Generally, aim to have at least three to six months of living expenses in an emergency fund. If you're a software programmer who has little trouble finding work, a couple of months' worth may be enough. If you're a 200-pound jockey who's the sole supporter of six children, three aged parents and a llama, you may want to aim for a year's worth of expenses in ready funds.

Beyond your emergency fund, any funds you'll need within three to five years (or longer, to be more conservative) shouldn't be in stocks. Stocks can be terrific over long periods, but in the short run, anything can happen -- like 2008. You don't want the market to plunge three months before you have to make a massive tuition payment.

Short-term savings belong in instruments such as money market accounts, certificates of deposit (CDs), short- to mid-term government and corporate bonds, and bond mutual funds. Your return will vary, of course, but right now some money market accounts are paying around 2 to 3 percent. CD rates depend on how long you're willing to tie up your money, but short-term CDs start out with rates similar to money market fund rates and go up in small increments as the term gets longer. Corporate bonds tend to pay more than CDs or Treasury bonds, depending on the risk of the bond.

Learn more about your short-term savings options at www.fool.com/savings and www.bankrate.com.


Annuity Headaches

A few years ago, I rolled over money from a 401(k) from a previous job into an annuity without knowing what I was doing. It was making money, but then I looked into what I was paying for it -- ouch! It earned 12 percent in 2006, but the S&P 500 earned more than 15 percent that year. I want out, but there's a significant penalty for withdrawing early. -- Ell, Minneapolis

The Fool Responds: First off, you were smart to not just cash out your 401(k) when you changed jobs, as too many people are doing. But as you've learned, annuities have a lot of downsides. Annuity fees can be more than twice as high as typical mutual fund fees and 10 times higher than some basic index funds. Early withdrawal penalties can top 5 percent. Variable annuities are generally the least useful, but fixed-income annuities can serve some folks well, offering a regular income for life in exchange for a hefty upfront payment. They leave little for heirs, though. Learn more at www.fool.com/retirement/annuities/annuities.htm and www.sec.gov/answers/annuity.htm.


I was founded in 1901 by two Milwaukee men intent on "taking the work out of bicycling." (Back then you'd buy gas for my products a pint at a time, at drugstores.) Twenty-thousand of my products served in World War I. In 1965 I set a world land speed record of 177 mph. I'm known for teardrop-shaped gas tanks, "knucklehead" engines, "Fat Boys," and the Buell, Cagiva and MV Agusta brands. My stock price has accelerated some 16-fold over the last 20 years, I rake in more than $5 billion annually, and my ticker symbol is rather porcine. Who am I?

Last Week's Trivia Answer: I trace my history back to 1871 and a steam-powered rock drill. In the 1920s, my jackhammer drills and air compressors worked on Mount Rushmore. Today, headquartered in New Jersey, I'm a global diversified industrial firm, with businesses including Club Car golf cars, Hussmann stationary refrigeration equipment, Schlage locks, Thermo King transport temperature-control equipment, and Trane air conditioning systems and services. (I bought Trane in 2008 for $10 billion.) I've paid dividends each year since 1910. I raked in more than $13 billion in revenue in 2008. My name reflects a 1905 merger. Who am I? (Answer: Ingersoll Rand)


Boeing: Wheels Up in a Year

Boeing (NYSE: BA) finally provided its investors with some good news recently: The 787 Dreamliner project is finally on track.

After a series of delays, Boeing expects to conduct the first-ever test flight of its aeronautical albatross within the next three months. If all goes well, it will start building actual for-sale versions for delivery in Q1 2010. (That's nearly two years behind schedule.)

Airlines are suffering these days, with traffic in a tailspin, but Delta still confirmed that it intends to buy 18 of Boeing's new fuel-sipping 787s. (That run of $150-per-barrel oil must still have some airlines spooked.)


That's enough business to keep the commercial side of Boeing busy for well over two years (at current revenue rates) -- but it's still only about 38 percent of the total business Boeing has booked into backlog.

With a dividend yield around 5 percent, and a P/E near 10, Boeing just might be as cheap as it looks.

StAugustine AllAccess

Trending this week:

