Winds of change are helping new fund

Oil tycoon T. Boone Pickens has been aggressively touting wind power as an alternative energy source, indicating that the wind energy industry may have reached a tipping point in interest and investment. Enter the PowerShares Global Wind Energy Portfolio (Nasdaq: PWND), a new exchange-traded fund offering investors access to a concentrated portfolio of wind energy stocks.

With an expense ratio (annual fee) of 0.75 percent, the fund is based on an index of companies that manufacture, develop, distribute and install energy derived from wind sources. It sports many small-cap stocks that aren’t otherwise available on U.S. markets.

As some small global companies are included in Global Wind’s portfolio, investors should brace for greater market volatility, higher transactional costs, taxation by foreign governments and political instability, among other risks.

Moreover, with only 32 stocks in its portfolio, the fund is highly concentrated, not diversified. If another energy technology, such as solar, ends up being the alternative energy winner, then this fund may suffer.

The Global Wind Energy Council estimates that worldwide installed wind power increased 31 percent from 2006 to 2007, marking the third year of record-setting growth. If energy prices fall, that trend could reverse itself and make wind less attractive. But there’s no sign of an impending collapse in oil.

Ask the Fool

Q: Is it crazy to consider investing in companies with losses when there are so many profitable companies out there? – Z.G., Santa Maria, Calif.

A: Many (if not most) great companies started out losing money. Enterprises in their infancy typically have to make large investments in order to ramp up and grow. So while a firm might be generating hefty revenues, it might be spending even more on advertising and expanding its infrastructure to establish a strong position in its industry. At a later date, it can spend less and enjoy profits.

It’s not stupid to invest in unprofitable companies – as long as you’ve done enough research to be very confident that they’ll one day be profitable. These firms can be riskier than more established companies. Many will end up failing, while others will become companies like Nike and PepsiCo. Don’t park too much of your money in unprofitable companies, though.

There’s nothing wrong with investing more conservatively by focusing on profitable businesses, as there are plenty of them, and they can be more reliable. You can look up companies’ historical performances online at http://caps.fool.com and http://moneycentral.msn.com/ investor/research/welcome.asp.

Q: What’s the current tax rate on capital gains from stocks that I sell? – K.L., Lake Charles, La.

A: Right now, for most people it’s 15 percent for stocks held for more than a year. Short-term gains, from stocks held a year or less, are taxed at your ordinary income tax rate, which can be as high as 35 percent. Patience can be profitable for stock investors. (Note that the rate can change in the future. At the moment it’s scheduled to revert to 18 or 20 percent in 2010 for most people.)

My dumbest investment

In 1989, on a recommendation from a prestigious brokerage, I bought 200 shares of Furr’s Restaurant stock after Kmart spun it off. It cost about $10 per share, and it was paying $2 per share in dividends, for a 20 percent yield. Within the first year, though, the dividend was reduced to nearly nothing and the stock price sank. A little later, there was a 1-for-4 reverse split, leaving me with 50 shares. Several more reverse splits happened, leaving me with 3.125 shares. I finally sold them, reaping a total sum of $5.40 after brokerage commissions. – B.E., via e-mail

The Fool Responds: Tread carefully around steep dividend yields. Remember that the yield is the annual dividend divided by the current share price. If the share price drops, the yield will rise. So a company with a steep dividend yield is likely to have fallen sharply in price, often for a good reason.

Companies in trouble have to consider reducing or eliminating their dividends. Reverse splits, meanwhile, are usually a sign of trouble. Steer clear of such situations, and look for healthy, growing dividend payers.