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Spokane, Washington  Est. May 19, 1883

The Motley Fool: Plug in to Emerson Electric

The Motley Fool

Investors seeking dividends and growth should consider the diversified industrial manufacturer Emerson Electric (NYSE: EMR). Founded way back in 1890, the company makes everything from valves, actuators and regulators to entire alternators, motors and even drives – plus the software to run them all. In an economy that’s continually becoming more electric (even our cars), its future is promising.

The company has five key business divisions – Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions – serving the industrial, commercial and consumer markets. Its operations in the oil and gas industry (such as servicing reservoirs and refineries) have been hurt by low prices for both, with near-term prospects not exciting. Still, even in these challenging years, its profit margins have not shrunk much, and it’s generating more than $1 billion in annual free cash flow.

At a recent investor conference, management outlined plans to shed Emerson’s network power segment and sell its motors and drives, power generation and storage businesses, in order to focus on faster-growing and higher-profit-margin businesses.

Then there’s Emerson’s dividend, which recently yielded 3.7 percent. It has been increased by an annual average of 7 percent over the past five years and has plenty of room for further hikes. The company has been rewarding shareholders via share buybacks, too. (The Motley Fool has recommended Emerson Electric.)

Ask the Fool

Q: Can I avoid making dumb investing mistakes if I stick with mutual funds instead of stocks? - H.C., Salisbury, Maryland

A: Not necessarily. You need to be sure to choose solid funds, with low fees and smart managers – or just opt for inexpensive broad-market index funds, such as ones that track the S&P 500. Once you’re invested in some good funds for the long term, stay the course. Too many investors panic when the market heads south, selling not only stocks but also their mutual fund shares.

According to data from Dalbar and Lipper, the average stock-holding mutual fund delivered an annualized return of 9.1 percent from 1995 to 2014, but the average shareholder of such funds earned only 5.2 percent on average per year. Why the big difference? Because investors succumbed to emotions such as fear instead of sticking with their investment plan and strategy.

Over 20 years, a $10,000 investment would grow to $27,500 at 5.2 percent annually, but at an annual growth rate of 9.1 percent, it would reach a whopping $57,000. Being impatient or fearful can be very costly.

Q: What’s a money market fund? - T.R., Lima, Ohio

A: Similar to a money market account (but not carrying FDIC insurance), it’s a mutual fund invested in short-term, high-quality investments such as Treasury bills, short-term commercial debt and certificates of deposit (CDs). It’s viewed as relatively safe, with yields that vary according to short-term interest rates and typically exceed rates offered by standard bank accounts.

Money market fund yields are usually well below the stock market’s historical average annual return of close to 10 percent. They’re great for short-term savings, but ill-suited for long-term investments, as your money won’t grow very quickly.

My dumbest investment

My dumbest investment was putting money in Canadian Bre-X Minerals, a gold-mining company. Some established gold-mining companies were interested in it, so I figured if it was good enough for them to take seriously, I could, too. - T., online

The Fool responds: Bre-X’s story is a disastrous cautionary tale for all investors. Back in the early 1990s, after drilling for gold in Borneo, the company reported finding a major gold deposit. Its stock soared and more investors jumped in; its shares, which had debuted at less than a dollar apiece, skyrocketed at one point to more than $250. Big-name companies were associating with Bre-X, lending it more credibility – indeed, J.P. Morgan & Co. was advising it.

Well, eventually, the truth came out. When the American mining company Freeport-McMoRan was considering doing business with Bre-X, it did some due diligence. It turned out that Bre-X’s management had been engaging in fraud, having planted gold for others to verify. Shares plunged in short order, wiping out many investors. As the truth was coming out, the company’s chief geologist fell to his death from a helicopter, with many suspecting that he did so intentionally.

Bre-X serves to remind us that some companies can be engaged in fraud, and that it can be safer to stick to established, proven companies with track records of growing revenue and earnings. Be wary of too-good-to-be-true stories.