Motley Fool: Risks and potential

Shares of pharmaceutical company Merck (NYSE: MRK) were recently down about 40% over the past year, partly due to concerns about global tariff risks.

Merck’s first-quarter results showed a 2% decline in sales. (Excluding currency effects, revenue grew by 1%.) Merck also said it anticipated $200 million in costs due to tariffs this year; China, hit heavily with tariffs, is an important market for Merck. But the situation is volatile. In mid-May, the U.S. and China both agreed to significantly reduce tariff rates for 90 days. And soon after, a federal court blocked President Donald Trump’s global tariffs.

Long-term investors might not worry too much about tariffs, as they may be a temporary problem. With Merck stock recently trading at a low price-to-earnings (P/E) ratio of 11 (well below its five-year average of 23), investors get a discount for the stock’s risk and uncertainty.

The business may not even be that risky. Merck is launching a new version of its popular cancer drug, Keytruda, to offset declines in revenue that may result from an upcoming loss of patent protection. It’s also made a deal to develop a GLP-1 weight loss drug.

There’s reason to remain bullish about Merck’s growth prospects in the long run. And at a discounted price, the stock could be a steal of a deal. It recently offered a dividend yield of 4.2%, as well. (The Motley Fool owns shares of and recommends Merck.)

Ask the Fool

Q. Is it possible to own too many shares of one stock? – M.A., Winona, Minnesota

A. The number of shares you own doesn’t matter that much; think instead of value. For example, whether you own 3 shares or 3,000 shares of a certain stock, if they make up 50% of your portfolio, you’ve got too many eggs in one basket.

A stock’s price doesn’t mean too much by itself, either. For example, there isn’t much difference between owning 500 shares of a $10 stock (total value: $5,000) or 10 shares of a $500 stock (total value: $5,000). The $10 stock might actually be overvalued, while the $500 stock might be a bargain, about to quadruple in value over the coming decade.

While it’s important to diversify and not invest too much in any one stock or industry, you might want to avoid diversifying so much that you have only a tiny portion of your portfolio in any one stock. In such a case, even if the stock triples, it won’t give your portfolio much of a bump.

Q. What’s the current capital gains tax rate? – R.B., Santa Maria, California

A. It varies, depending on your income level and how long you owned the asset before selling. Short-term capital gains, from assets held a year or less, are taxed as ordinary income. Long-term gains, from assets held for more than a year, face a 0% tax rate for those whose income is sufficiently low, a 15% tax rate for many people and a 20% rate for high-income folks.

Remember that you may be able to offset some of your gains if you’ve had any capital losses.

My Dumbest Investment

My most regrettable investment? Well, I’ve been retired for many years and have a taxable account and an IRA. I am basically a buy-and-hold investor and invest in stocks and exchange-traded funds (ETFs) with dividend yields greater than 3%. Overall, my investments have done very well – except in one area. A few years ago, I was advised to diversify even more by adding some international stocks. I did this by buying into ETFs that focused on international dividend-paying stocks. Most of them have declined in value by a large amount but keep paying dividends, so current yields now range from 4% to 11%. – P.W., online

The Fool responds: Diversification is good, but it’s too bad that these investments fell in value. Since they were dividend payers, at least you did get to collect dividends from them. And as you know, healthy and growing dividend-paying stocks tend to increase their payouts over time – so the amount you’ve collected from them has likely increased, too.

Still, falling returns are indeed disappointing. We’re big fans of ETFs in general, but not all are great investments. You might do more research to uncover better-performing dividend ETFs, but note that even great investments can underperform for a while.

(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)