Please respond to The Motley Fool 
======================== THE MOTLEY FOOL ========================
                        INVESTING  BASICS
                      Tuesday, May 22, 2001
benjamin.rogers@enron.com
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IN THIS ISSUE
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- Q&A: 401(K) MATCHING FUNDS?

- Q&A: WHAT HAPPENS TO MY STOCK IF THERE'S A MERGER?

- LESSON: DIVIDEND YIELDS

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YOUR QUESTIONS ANSWERED

Q. My company matches a certain percent of my pay, depending on
how much
I contribute to my 401(k) plan. The matching money goes only
into the company employee stock-purchase program, but my own
contributions can go into various mutual funds. Shouldn't I at
least contribute enough to this 401(k) to get the maximum amount
that the company will match?

A. You've answered your own question correctly. In most cases,
it's definitely smart to take advantage of as much company
matching as possible. Let's say that for every $1 you sock away
in your 401(k), your employer chips in 50 cents. That's an
immediate 50 percent return! It would be extremely difficult to
beat that with any investment method.

The only time it might not be so great is if the matching money
isn't going into something you're comfortable with. If it's
going into stock in the company and you're very uncomfortable
about the company's future, then perhaps you're getting a 50
percent return that will soon become a 0 percent return. That's
an extreme example, though. And even in that case, the money
that YOU socked away can be in a safer place, growing. For a
60-second guide to 401(k)s, check out this article.


Q. If I own shares of a company and the company is bought out or
merges with another company, what happens to my shares?
http://www.fool.com/m.asp?i=413428

A. Several things could happen. If the firm is bought out for
cash, you might receive a check for your shares. If it's bought
with stock or there's a merger involving a stock swap, your
shares might be replaced with shares of another company. The
number of shares you get will be prescribed by an announced
formula. Some deals involve both stock and cash. When a deal
you're interested in is announced, track down its press releases
for details.


P.S. GOT AN INVESTING QUESTION FOR US? Post it on our Ask a
Foolish Question message board.
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THIS WEEK'S LESSON

DIVIDEND YIELDS
A company's "dividend yield" is a valuable concept to
understand, but many people scratch their heads when confronted
with it. So let us explain. It simply expresses the relationship
of two numbers: a stock's price and the amount of its annual dividend.

As an example, look at Ford Motor Co. At the time of this
writing, it was trading around $51 per share, and paying out $2
per year (in quarterly installments) as a dividend. Take $2 and
divide it by $51 and you'll get 0.039. Multiply that by 100 and
you've got a dividend yield of 3.9%. This means that if you pay
$51 for a share of Ford, you'll earn 3.9% per year on your
investment, just from dividends alone.

Companies rarely decrease or eliminate their dividends, as that
would make investors unhappy. But, dividends of solid companies
do tend to rise over time, delivering more value to
shareholders. Every now and then, a company will announce an
increase. If, in 20 years, Ford's dividend is $8, that would
represent a 15.7% dividend yield on those shares you bought for
$51. You'd be earning a 15.7% return each year, just from
dividends. There would probably be some stock price appreciation
on top of that, as well.

Note that, for months or years at a time, a dividend will hold
steady. But, the yield can fluctuate daily. That's because a
stock's price fluctuates. As a stock price rises, the dividend
yield falls, and vice versa. If Ford shares, for example,
suddenly doubled in price to $102, the yield would be halved, to
2% ($2 divided by $102 is 0.02). If Ford stock fell to $30 per
share, its yield for those buying it at $30 would be 6.7%.

You can find some hefty dividend yields among companies whose
stock prices have tumbled. A year or two ago, for example, R. J.
Reynolds Tobacco Holdings paid about $3.00 per share in annual
dividends. With its stock trading around $30 per share, that was
a whopping 10% dividend yield! Be careful, though. If you're
attracted to an unusually high dividend yield, you should
probably study the company extra carefully to make sure it's not
in so much trouble that a dividend cut is around the corner.

Lastly, know that not all companies pay dividends. Younger or
quickly growing companies in particular, such as Microsoft or
Amgen, prefer to plow extra cash back into operations.

=================================================================

SPONSORED BY: Kaplan College
Become a Financial Planner! Kaplan College's online Cert.
in Financial Planning program prepares you for success in
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today!
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