Business & Real Estate

The Motley Fool

ASK THE FOOL

A different dividend

Q: What’s a stock dividend?

G.W., Manchester, N.H.

A: You’re probably familiar with traditional dividends, which involve companies with excess cash paying out some of it to shareholders in the form of cash dividends every quarter (and sometimes every month).

But not all dividends are paid in cash. A company might opt to reward shareholders with additional shares of stock, instead. That can seem more appealing for us investors, but by increasing its share count, the company is diluting the value of existing shares. (Imagine a pizza, where the more slices there are, the smaller each one is.)

The idea can appeal to the company’s management, though, as it gets to reward shareholders without sacrificing any cash. It awards shareholders a share or a fraction of a share for each share owned, and in many ways is like a stock split.

Q: How many shareholders do companies usually have?

P.Y., Memphis, Tenn.

A: It can vary widely. Privately held companies might have just a few, but publicly traded ones typically have many thousands. Hormel, for example, cites about 13,800 shareholders of record, while Kroger has 30,449.

Keep in mind that the number of shareholders changes all the time as shares are bought and sold, and that the numbers are rarely exact. Many shares are held in “street name,” too, meaning that their brokerage holds their shares for them, and the company may not know how many individuals make up that block of brokerage shares or who they are.

IBM, for example, has stated that, “At year-end 2012, there were 491,541 registered owners of IBM stock. Another 1,600,000 stockholders own IBM stock through brokerage firms, banks, credit unions and other financial institutions.”

FOOLISH TRIVIA

One of my roots goes back to 1833 and another to 1889, when a company was founded in the Netherlands to process concentrated fruit juices. By 1917, another key predecessor company had a presence in Manhattan and was importing essential oils. A 1958 merger gave me my current name and made me a major supplier in the flavor and fragrance industry. My flavor compounds are used in foods, drinks and sweets, while my fragrances are used in everything from perfumes to detergents to deodorants. My 2000 acquisition of Bush Boake Allen created the world’s largest flavor and fragrance company. Who am I?

Last week’s trivia answer: The Kroger Co.

MY DUMBEST INVESTMENT

Costly advice

My dumbest investment move was listening to a broker from a large brokerage. I figured he had to be very savvy to work there. I told him, back around 1994, to buy shares of America Online, Dell, Microsoft and Johnson & Johnson, among other stocks.

Instead, he pushed his presumably better ideas and soon I was invested in them. Then, just before some of them went up, he said that his brokerage was recommending real estate investment trusts (REITs) now. I was moved into some of them, and they dropped in value. For all this, I was paying him more than $6,000 per year. I could have had millions by investing on my own.

F.I., Dover, Okla.

The Fool responds: Some financial advisers have conflicts of interest, getting compensated by having you make certain investments. And a brokerage will profit more if you trade frequently, as it charges trading commissions. You might already be a savvier stock picker than your adviser, or you can become one by reading and learning. You’ll cost yourself less, too, investing on your own. Remember, some brokers are mostly salespeople.

FOOL’S SCHOOL

Terms to know

Understanding the following terms can help you be a better investor:

▪ Book value: A company’s assets, minus liabilities and intangible assets, which can be calculated via the company’s balance sheet. It represents what would be left over in assets if the company went out of business.

▪ Bull (and bear) market: When the overall market gains (or loses) value over an extended period of time. There’s no official definition, but many feel a gain (or drop) of at least 10 percent is needed to qualify. (A smaller drop is often called a “correction.”)

▪ Capital appreciation: One of the two components of total return (along with dividend yield), capital appreciation reflects how much the underlying value of a security has increased. If you bought a stock at $20 per share and it has risen to $23, you’ve got 15 percent appreciation on your investment.

▪ Capital gain/loss: The difference between the price at which an asset is sold and its original purchase price (or “basis”). Buy a stock for $10 and sell it for $15, and you’ve got a capital gain of $5, less trading costs.

▪ Liquidity: A measure of how quickly an asset can be sold at a fair price and converted to cash, such as mutual funds and most major stocks. Illiquid assets include stocks with low trading volume, real estate and antiques.

▪ Market timing: An investment strategy based on predicting short-term price changes in securities, which is virtually impossible to do.

▪ Standard & Poor’s 500 Index: An index of 500 of America’s biggest publicly traded companies. The S&P 500 is considered a good measurement of the overall U.S. stock market, and indeed, it represents about 80 percent of the market.

▪ Treasury bill (T-bill): A short-term debt obligation issued by the U.S. government, with a maturity of one year or less. It’s sold at a discount, so that you collect no coupon payments but receive the full value at maturity.

Learn more terms at investopedia.com and investorwords.com.

THE FOOL TAKE

Energize your portfolio

If you’re looking for a seemingly undervalued stock with a fat dividend, check out Enerplus (NYSE: ERF). It’s a North American oil, gas and natural gas liquids exploration and production company, which, not surprisingly, has been whacked by falling oil prices that can lower its top- and bottom-line results.

Still, there’s a lot of growth potential in Enerplus, even with oil prices at multiyear lows. Enerplus has employed hedging techniques to shield some of its production, locking in higher-than-prevailing prices.

Meanwhile, Enerplus’ juiciest assets are sitting in the oil-rich Williston Basin, which spans North Dakota, South Dakota, Montana and Saskatchewan. Whether it’s selling at the wellhead, in Cushing, Okla., or shipping by rail to Louisiana to take advantage of the Brent-West Texas Intermediate spread, Enerplus has a number of options available to get the best possible price for its assets.

Enerplus has also been a leader in “downspacing” – putting more than one well in a space where, traditionally, only one well would operate. This method could give Enerplus a way to quickly boost its yield and profits.

Enerplus offers investors a monthly dividend with an annual dividend yield recently near 10 percent. It’s not without risk, especially if oil prices keep falling, but with a forward-looking price-to-earnings (P/E) ratio near 11, well below its five-year average, Enerplus is inviting.

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