Investing

The Motley Fool: Useful tips on investing

High yield

Q: What are “high-yield” stocks?

A: They’re stocks that pay generous dividends, as expressed by their dividend yield.

A dividend yield is simply a company’s current annual dividend amount divided by its stock’s current price.

Many solid companies, such as FedEx and Nike, sport low dividend yields. Others, such as Amazon.com, Facebook and Alphabet, pay no dividend at all. That’s not necessarily bad — it just suggests that they have better things to do with their money, such as reinvesting it to grow their business. Dividends aren’t guaranteed, but with established, growing companies, they’re rather reliable.

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Q: Can you explain the significance of tulips in financial history? I gather something interesting happened with them long ago.

A: There was a “tulipmania” in Holland in the mid-1600s. It’s one of the first documented cases of a speculative investing frenzy, with some people even taking out loans on their homes to buy tulip bulbs. Prices soared, with some bulbs eventually valued at more than the cost of a nice house, and then the bubble eventually burst, wiping out many investors.

The easiest way to avoid such trouble is to not invest with borrowed money and to be wary of stocks that seem to have soared beyond reason.

Volcanic ash

Dear Fool: Many years ago, my husband and I accumulated some money, and he asked me to help him find a good investment. Noting the boom in computers, printers and copiers, I suggested a particular paper company. Because of its timber holdings, the company didn’t need to buy pulp, as it had its own source of raw material. We invested our nest egg in it.

Shortly after making the investment, the IRS changed the tax rules for valuing timber, and this hurt the company. Then, in 1980, Mount St. Helens erupted, and thousands of acres of the company’s timber were destroyed. My husband no longer asks my opinion on investments.

The Fool responds: Don’t be too hard on yourself. Even the best investors regret some investments. It was a mistake, though, to put all your eggs in just one basket, because even terrific companies can fall on hard times. It’s best to spread your assets over perhaps 10 to 15 investments — or simply to park your money in a broad-market index fund that will instantly have you diversified.

You were smart to think about which businesses had promising futures and to look for adjacent industries that might grow with them. Patience is helpful for investors, too. The company replanted more than 18 million new trees over seven years, and its stock has averaged 7.5 percent annual growth since the eruption.

A pipeline of potential profits

When evaluating drugmakers as possible investments, it’s important to check out their pipelines of products in development. It can take a decade or longer for a drug to pass all clinical trials and get approved by the Food and Drug Administration (FDA), and many drugs in development never end up approved for sale. Thus, a big pipeline is promising, because it’s likely that at least some drugs will make it to market.

For a hefty pipeline, check out the Swiss pharmaceutical giant Roche (NasdaqOTH: RHHBY). It sports about 150 clinical programs in development, including some for combination treatments based on the company’s already-approved drugs. Cancer drug Tecentriq, for example, is included in more than a dozen studies in combination with other drugs.

Roche also leads its industry with 14 of its drugs in development designated by the FDA as “breakthrough therapies” — with their early stage clinical data suggesting a vast improvement over existing options.

Looking beyond 2018, Roche has a potential wave of regulatory filings on the way and could submit 25 drugs for approval. Among the most notable candidates are autoimmune disease drug etrolizumab and two experimental Alzheimer’s disease drugs.

Meanwhile, Roche recently won regulatory approval for multiple-sclerosis drug Ocrevus. The drug is expected to generate sales of more than $3 billion.

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