March 25, 2012 in Business

General Electric stock looks promising for the long run

 

Looking for a long-term stock for your portfolio? Consider General Electric.

Yes, it was damaged by the recent financial meltdown, lost its coveted AAA debt rating and slashed its dividend during that disastrous period. But it has done a lot for itself and its shareholders since then.

It reinstated its dividend, and has been upping it, too. Its yield was recently a solid 3.6 percent.

While it’s true that General Electric’s debt is no longer AAA worthy, it does still sport a AA+ debt rating, just one notch below that rarefied level.

It’s also executing a strong, future-oriented business strategy. Whether nuclear, natural gas, solar or wind (or “all of the above”) will be key to the world’s future energy needs, General Electric’s power generation systems are poised to lead. And as energy efficiency remains at least as important as new generation, its Ecomagination initiative provides a strong foundation there, for business lines ranging from light bulbs to locomotives.

Shareholder-friendly dividends. World-class balance sheet strength. A focus on the future that will keep it relevant for a long time to come. Yes, it’s always a leap of faith to buy a stock with the intention of holding it for the long run. But when it comes to General Electric, it’s a leap with a strong tailwind supporting it.

Ask the Fool

Q: How can you tell if a company pays a dividend, and how big it is? – H.C., Medford, Ore.

A: You can call the company and ask, or look it up online or in newspaper stock listings.

Instead of the dividend itself, many stock listings include the dividend yield, which is the percentage of the current stock price being paid out annually in dividends. If there’s a yield, it means there’s a dividend.

To figure out the dividend from the yield, multiply the yield by the stock price.

Imagine that MacDonald Farms Inc. (ticker: EIEIO) is trading at $60 per share with a yield of 2 percent (which is 0.02). Multiply 0.02 by 60 and you’ll get 1.20, meaning that the company is currently paying out $1.20 each year in dividends per share. (Companies often pay dividends quarterly, so this would be $0.30 per quarter.)

Q: I’ve set some stop orders on stocks I bought at around 15 to 20 percent below the current price. This has resulted in some promising stocks getting sold before they have a chance to perform. What am I doing wrong? – D.N., Topeka, Kan.

A: Stop orders are placed with brokers to automatically sell shares if they drop to a certain level. They’re meant to protect you if a stock suddenly plunges. But they’ll also kick you out of stocks that drop briefly.

If you’re planning to hang on to a stock for years, you might want to just expect some volatility and avoid stop orders. Or set your stops at 25 or 30 percent.

My smartest investment

In 1999 I was looking for a conservative investment that offered good income plus security. I found a local credit union offering 7.25 percent interest if I locked up my money for five years.

After some soul-searching, I deposited a hefty amount. Over the next few years, I laughed all the way from the bank. – I.K., San Diego

The Fool responds: That was indeed a good deal at the time, and it looks even more fetching now, when interest rates are near record lows. It can be tempting, when you run across a good deal, to hold off, hoping for something even better. But remember the old proverb – one in the hand is worth two in the bush. If the interest rate more than met your needs, you were right to act on it.

You were also smart to do business with a credit union, as they often have very competitive rates.


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