ASK THE FOOL
How Many Shares?
Q. Is the number of shares of a company that can be bought limited in any way? – P.L., Lawrence, Kansas
A. Yup. Each publicly traded company has a certain number of “shares outstanding” – and that number stays fixed until or unless it issues more shares, buys back shares or splits its shares.
Companies first issue shares when they “go public” via an initial public offering (IPO). They sometimes issue more later, via “secondary” offerings. (The more shares a company has, the smaller stake in the company each share represents.)
In theory, you might try to buy all available shares of a company, but in the process of doing so, your demand would drive up the price of the shares. (This is why big investors such as Warren Buffett don’t publicize their purchases, and why they try to buy chunks of shares over time.)
Buying all the shares of most companies would be very costly, too: Fedex, for example, recently had around 259 million shares outstanding, and a recent share price of $233. To buy all those shares, you’d need around $60 billion.
Q. What is “Nasdaq”? – K.W., Arlington, Virginia
A. The National Association of Securities Dealers Automated Quotation system (NASDAQ) was launched in 1971 to help investors access stock prices. It later became the first electronic stock market through which investors could trade shares.
The Nasdaq Stock Market is now the largest electronic stock market, where more than 5,000 companies are listed. These include Costco and Starbucks, as well as lots of technology-focused businesses, such as Amazon.com, Apple, Microsoft and Netflix.
FOOL’S SCHOOL Focus on Dividend Growth
It’s smart to seek strong dividendpaying stocks for your portfolio. But don’t just focus on dividend yields. Yield is important, but so is the dividend’s growth rate.
A dividend’s yield expresses how much of the stock’s price you’ll receive annually in dividend form. To calculate it, you divide the annual dividend amount by the current stock price.
As an example, if Buzzy’s Broccoli Beer (ticker: BRRRP) pays $0.25 per quarter, or $1 per year, and is trading at $33 per share, its yield will be $1 divided by $33 – which is about 0.03, or 3%.
It’s great to have dividend payers in your portfolio because they tend to keep paying you regularly, no matter what the overall economy is doing or whether the stock is rising or falling. (If a dividend-paying company is really struggling, though, it’s possible that it will reduce, suspend or eliminate its payout.) Another great thing about dividends from healthy and growing companies is that they tend to be increased over time.
Check this out: Imagine that you bought 100 shares of Buzzy’s for $3,300. You’d receive $100 in dividends in the first year (100 shares times $1 each in dividends). Let’s say that Buzzy’s increases its dividend by about 7% annually. In 10 years, its dividend will be nearly $2 per share, delivering $200 in annual income. Fifteen years after that, the dividend will pay around $543. On your $3,300 purchase, you’re now receiving $543 for the year. That’s an effective dividend yield of 16% on your original investment!
Better still, assuming that Buzzy’s is still healthy and growing, the shares themselves will have increased in value over those years, too. If they’re at $180 per share, that $5.43-per-share dividend will still sport a yield of 3%. But those who bought long ago will be getting a yield that’s effectively much higher.
Learn more about dividend stocks at Fool.com – click on “Stock Market” near the top of the page.
FOOLISH TRIVIA Name That Company
I trace my roots to 1871, when my founder became an apprentice druggist. Soon, he was a partner in a business wholesaling drugs. My name changed over time due to acquisitions and mergers. Today, with a market value recently near $30 billion, I rake in nearly $230 billion annually. I’m a major health care distributor, employing 42,000 people; I offer a range of services, from delivering pharmaceuticals and health care products to providing technology for veterinary practices and other health care organizations. I even have a franchise program, Good Neighbor Pharmacy, for independent pharmacies. My ticker symbol evokes memories of kindergarten. Who am I?
Last Week’s Trivia Answer
I trace my roots back to 1910, when my founder, then 18, sold two shoeboxes full of picture postcards in Kansas City, Missouri. I was soon offering valentines and Christmas cards with accompanying envelopes. I introduced fancy gift wrap in 1917 and collectible ornaments in the 1970s. In 1984, I bought the Crayola crayon business. TV programs I’ve sponsored have won more than 80 Emmy awards. Today, I’m valued at around $3.5 billion, and I employ about 27,000 people worldwide. My Crown Media subsidiary boasts three cable channels, and I even have a real estate development company. Who am I? (Answer: Hallmark Cards)