October 6, 2013 in Business

Motley Fool: Recent returns show Microsoft could reward patient investors

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Microsoft (Nasdaq: MSFT) stock just got more attractive. Whether it’s attractive enough to buy remains in question.

The computing giant recently announced a 22 percent increase in its dividend and renewed a $40 billion share-buyback plan. The increase hiked the yield to 3.4 percent at the time, compelling for those seeking income. The buyback represented 15 percent of the company’s $274 billion market value at the time. It could shrink the number of shares outstanding considerably, giving each remaining share a bigger claim on profits. Microsoft CFO Amy Hood explained that these moves “reflect a continued commitment to returning cash to our shareholders.”

Bulls are hopeful that the recently somewhat beleaguered company will turn itself around as it focuses more on devices and services, and brings in a new CEO to replace retiring Steve Ballmer. There’s strength in its server and tools software segment, and its dominance in business software with its Office suite is a major asset. Investors are hopeful about October’s Windows 8.1 update and November’s Xbox One release.

Bears are skeptical about its $7 billion purchase of Nokia, combining its weak smartphone software platform with a struggling cellphone maker.

This is a company in transition, and one that will reward patient believers while they wait. (The Motley Fool owns shares of Microsoft and its newsletters have recommended options on it and Nokia.)

Ask the Fool

Q: I’ve noticed that many of the stocks recommended in The Motley Fool’s “Rule Breakers” newsletter can be volatile. I’m thinking of buying some, selling them after they go up four or five points, and then buying again after drops of several points. These holding periods would be anywhere from two weeks to two months. Does this make sense? And what are the tax consequences? – T.N., Caribou, Maine

A: It’s a risky strategy. Sure, some of our recommendations have doubled or tripled in value – but some have not. (Learn more at fool.com/shop/newsletters.) Those who have profited the most have hung on for many months, if not years. Remember, Warren Buffett has said his favorite holding period is “forever.” Remember, too, that some stocks surge strongly for a while without retreating – you’d lose out on a lot of gains if you were waiting on the sidelines for a dip in price.

Frequent trading will rack up lots of trading commissions for you. Tax-wise, while gains from stocks held more than a year get a lower tax rate (15 percent for most of us), shorter-term gains are taxed at your ordinary income rate, which could top 30 percent. We’d much rather invest in companies we really believe in, aiming to hang on for years.

Q: Where can I look up the cost of living in various cities? – G.S., Fargo, N.D.

A: There are lots of handy calculators online. Some, like CNN’s at money.cnn.com/ calculator/pf/cost-of-living, break out cost elements such as housing, food, transportation, utilities and health care. Think about what your personal major expense categories are, because some might not apply to you very much – such as health care if you’re young and healthy.

My dumbest investment

I fell for the ol’ “pump and dump” on a penny stock. My paper value increased briefly, then crashed to near zero. I earned what I deserved for putting money into a company I did not understand. – H.F., online

The Fool responds: We refer to stocks trading for less than about $5 per share as penny stocks, and we’ve long warned people to steer clear. Yes, some low-priced shares are tied to solid companies, some of which may be facing temporary troubles. But more typically, a penny stock’s underlying company offers more potential than performance, aiming to earn zillions once it strikes gold or cures cancer.

Because they’re so small, with relatively few shares, these stocks can be easy to manipulate. Pump-and-dump schemes involve a scammer hyping a stock online so that many buy into it, sending the shares (and his profits) skyward. Then he sells his shares, and the stock craters, wiping out many naive investors.

Minimize your risk by focusing on healthy and growing companies that you understand well – ideally ones with track records you can assess. Pennies can burn.

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