April 9, 1999

Fools in Newsprint

Fool School Lessons

The Power of Dividend Growth

You may think of venerable blue-chip companies such as Ford, Bell Atlantic, J.P. Morgan, and Chevron as stodgy and old-fangled, but think again. They pay generous dividends.

If you bought Ford when its dividend yield (annual dividend divided by share price) was 3.6%, you're very likely to get that 3.6% payout every year, regardless of what happens to the stock price. (Struggling companies may decrease or eliminate their dividends, but they try like heck not to because it looks really bad.) Couple stock appreciation with dividends and you've got an appealing combination.

Here's something investors rarely consider. Let's say you bought 10 shares of Stained Glass Windshield Co. (Ticker: STAIN) for $100 each and they pay a respectable 2.5% dividend. With a $1,000 investment, that amounts to an annual payout of $25. Not bad.

Better still, dividends aren't static and permanent. Companies raise them regularly. A few years down the line, perhaps STAIN is trading at $220 per share. If the yield is 3%, it's paying out $6.60 per share. Note: $6.60 is a 3% yield for anyone buying the stock at $220, but since you bought it at $100, to you it's a 6.6% yield.

Decades pass. Your initial 10 shares have split into 80 shares, each currently priced at $120. Your initial $1,000 investment is now valued at $9,600. The yield is still 3%, offering $3.60 per share. With 80 shares, you receive a whopping $288 per year. Think about this. You're earning $288 on a $1,000 investment. That's 29% per year (and growing) -- without even counting any stock price appreciation. The yield for you has gone from 2.5% to 29% all because you just hung on to those shares of a growing company. That's security, Fool! Even if the stock price drops, you're still likely to get that 29% payout.

With many great dividend-paying companies, you can insure your dividend yield keeps rising just by holding on to the stock. Consider this: One share of Coca-Cola bought in its first year has become more than 97,860 shares through stock splits and dividend reinvestments, and that investment is now earning an annual dividend of more than $58,000.

Great Investors: Anne Scheiber

When asked to name great investors, some people would probably list the likes of Warren Buffett and Peter Lynch. Others would just smile sheepishly, unable to name even one. After all, the folks most admired by Americans today are likely to be athletes, movie stars, or (yikes!) politicians.

Whether you know the greats or not, you've probably never heard of the rather Foolish Anne Scheiber. In 1932, Anne was a 38-year-old IRS auditor. Intrigued by the stock market, she forked over most of her life savings to her brother, a young stockbroker on Wall Street. Unfortunately, his firm went the way of the saber-toothed tiger and she lost all her money.

Determined to try again, but this time relying on herself, she saved $5,000 and plunked it back into stocks in 1944. By the time she died in 1995 (at the age of 101), her money had grown to $20 million. How'd she do it?

Well, for starters, she was a long-term, involved investor. She didn't buy a stock today and sell it tomorrow. She attended shareholder meetings and followed her companies closely. She bought big, name-brand companies like PepsiCo, Schering-Plough, Chrysler, and Coca-Cola, and reinvested her dividends. She placed her faith -- and her money -- in these growing companies and watched their earnings grow higher over decades. And when she died, Anne donated it all to Yeshiva University in New York.

Anne wasn't totally Foolish, though, as she didn't stop to smell the roses enough. Those who knew her say she was a recluse in her small, rent-controlled apartment. Never married and painfully frugal, she wore the same coat year after year and skipped meals to save money. Fools generally enjoy not just investing and compounding enormous long-term profits, but also family picnics, beating friends in board games, occasional trashy mystery books, and the messiness of children spilling cranberry juice on expensive furnishings.

Anne Scheiber's investment legacy provides a powerful example of what we can achieve if we are methodical and patient with our money. She also reminds us, though, to keep our noses in roses.

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