Motley Fool: The retail king

With the market having crashed recently, it’s a great time to go looking for bargains if you have some money to invest. Here’s a candidate to consider: Amazon.com (Nasdaq: AMZN). The stock actually recently hit an all-time high, but it often trades at a premium price – and then goes on to hit new highs.

Amazon is more than a huge retailer with more than 110 million Prime members worldwide. Its real long-term growth driver is its cloud-computing business, Amazon Web Services, or AWS, which is growing considerably faster than the company’s retail operations – with far fatter profit margins, too.

Amazon was in excellent shape when the coronavirus panic started in February – and it’s doing well in the COVID-19 era, too: Millions of Americans who are facing government-ordered lockdowns are relying on online orders and home-delivery systems to an unprecedented degree. Amazon responded by hiring another 100,000 workers, and recently announced that it’s hiring 75,000 more. It’s giving top priority to essential items such as medical supplies, groceries and household staples.

The pandemic experience will get many new customers used to online shopping; an entire generation is being trained to get what they need from e-commerce vendors like Amazon.

Consider buying some shares of Amazon.com, or at least putting it on your watch list. (The Motley Fool owns shares of and has recommended Amazon.com.)

Ask the Fool

Q: With so many stocks having plunged, pushing up dividend yields, is it smart to go hunting for fat dividend yields? – F.R., Cincinnati

A: In theory, yes. A dividend yield is a simple fraction: It’s the amount of a company’s annual dividend divided by its current stock price, so as a stock price falls, the yield will rise. And these days, most stocks have fallen – often by quite a lot, and largely not because of anything wrong with the companies involved, but just because the economy is challenged and shrinking.

For example, if the Wicker Sink Co. (ticker: SIEVE) pays out $0.50 per quarter, or $2 per year, and its stock price is $50, its dividend yield would be $2 divided by $50, or 0.04 – which is 4%. If the global pandemic sends its stock price down to $30, its yield will be $2 divided by $30, which is 0.067, or 6.7%. That’s a much fatter and more appealing dividend!

But be careful: Remember that if the company is really struggling with the economic pullback, it might be forced to reduce, suspend or even eliminate its dividend. So go ahead and look for fat payouts, but also make sure the company’s cash flow is fairly dependable.

Q: Can you recommend some easy-to-read books on how to invest in stocks? – K.W., Winona, Minnesota

A: Peter Lynch’s books are accessible classics for beginners, as are John Bogle’s “The Little Book of Common-Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns” (Wiley, $25) and “The Little Book That Still Beats the Market” by Joel Greenblatt (Wiley, $25). When you’re ready, you might read up on brokerages at TheAscent.com.

My dumbest investment

My dumbest investment happened when I was young: I tried to dip into penny stocks in order to make a lot of money. I had one huge winner and thought I was invincible, but I learned very quickly that the big win was, in statistics-speak, an outlier. Slow and steady wins the race every time. – T.P., online

The Fool responds: Penny stocks (those trading for less than about $5 per share) have burned many investors – mostly newbies who don’t yet realize that what seems too good to be true isn’t true: Just because you can buy 1,200 shares of a $0.25 stock with only $300 doesn’t mean you’ll soon own that many shares of a $10-per-share stock: A $0.25 stock can quickly fall to $0.05 or lower. Just because some stranger on the internet is suggesting that the not-yet-profitable company is on the verge of curing cancer or striking gold, that’s not likely to happen.

Your big win was indeed an outlier – a result that stands out because it’s different than others. And your lesson to take it slow and steady is right on – wealth is generally built with disciplined investing, dependable investments and patience. There are plenty of healthy, growing, cash-rich, low-debt companies trading for $50, $100 or more per share that will soar in the coming years.

For best results, just avoid penny stocks.