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Ask the Fool

Q. I've heard that you can save some money by combining student loans. Is this true? -- H. H.., Austin, Tex.

A. You heard right. The Department of Education has unveiled an exciting new opportunity for Fools (okay, and other people) who are saddled with sizable federal student loans. It's basically a chance to refinance debts at a low rate (7.46 percent this year). Multiple loans can also be consolidated into one, reducing monthly payment hassles. The savings for the typical borrower are estimated to be around $50 for each $1,000 borrowed. That adds up quickly; someone who owes $15,000 over a ten-year period can save about $750.

Act soon, though! You only have until January 31st, 1999 to get your application in to the Department of Education's Direct Loan Program. (Some private lenders may also offer the new low rate, but they're not required to.) Get more information on these Direct Consolidation Loans by calling 800-557-7392 or by visiting

Q. Please explain how companies are affected by the rise or fall of their stock prices. A company issuing stock gets its money upon issue. After that, when its shares are sold, the money goes from the buyer to the seller, not to the company, right? -- Marie Gookin, Vero Beach, Fla.

A. Yup. The stock price still matters, though. Executives and employees holding stock or options benefit when the stock rises. If the company wants to issue more stock, it will want to do so when the price is higher rather than lower, to generate more capital for fewer shares. If the company is buying another company with its stock, the higher the price, the more bang it gets for each share.

Meanwhile a company's falling stock price may make it more attractive to companies thinking of buying it. Stock is a form of capital and companies often hold a chunk of their own stock.


The Fool School

The Power of Dividend Growth

You may think of venerable blue chip companies such as Ford, Bell Atlantic, J. P. Morgan, and Chevron as stodgy and old-fangled, but think again. They pay generous dividends.

If you bought Ford when its dividend yield (annual dividend divided by share price) was 3.6 percent, you're very likely to get that 3.6 percent payout every year, regardless of what happens to the stock price. (Struggling companies may decrease or eliminate their dividends, but they try like heck not to, because it looks really bad.) Couple stock appreciation with dividends, and you've got an appealing combination.

Here's something investors rarely consider. Let's say you bought 10 shares of Stained Glass Windshield Co. (ticker: STAIN) for $100 each and they pay a respectable 2.5 percent dividend. With a $1,000 investment, that amounts to an annual payout of $25. Not bad.

Better still, dividends aren't static and permanent. Companies raise them regularly. A few years down the line, perhaps STAIN is trading at $220 per share. If the yield is 3 percent, it's paying out $6.60 per share. Note: $6.60 is a 3 percent yield for anyone buying the stock at $220, but since you bought it at $100, to you it's a 6.6 percent yield.

Decades pass. Your initial 10 shares have split into 80 shares, each currently priced at $120. Your initial $1,000 investment is now valued at $9,600. The yield is still 3 percent, offering $3.60 per share. With 80 shares, you receive a whopping $288 per year. Think about this. You're earning $288 on a $1,000 investment. That's 29 percent per year (and growing) -- without even counting any stock price appreciation. The yield for you has gone from 2.5 percent to 29 percent all because you just hung on to those shares of a growing company. That's security, Fool! Even if the stock price drops, you're still likely to get that 29 percent payout.

With many great dividend-paying companies, by holding on, your dividend yield keeps rising. Consider this: One share of Coca-Cola bought in its first year has become more than 97,860 shares through stock splits and dividend reinvestments, and that investment is now earning an annual dividend of more than $58,000.


My Smartest Investment

[ Note: smartest]

In the late 1980s, people everywhere were "investing" in all things Disney, except the stock. Instead of following the crowd and buying some Disney collectibles, I bought some shares of Disney. Since then it's gone up, on average, about 18 percent per year -- much better than any Mickey Mouse saltshaker, T-shirt or animation cell. -- F. X., Cherry Hill, N. J.

The Fool responds: That was a brilliant move. The best investments are often right in front of our eyes. Instead of dropping $200 on a big shopping spree at the mall, consider buying a few shares of a retailer that you know well and is doing well. Put off upgrading your computer for a year, and buy a few shares of a computer-related company instead. In the long run, the clothes will go out of fashion and the computer will grow obsolete, but the stock market will increase in value.


The Fool Take

Money Begets Money

Biotech bellwether Amgen surprised investors recently by winning an arbitration battle against pharmaceutical giant Johnson & Johnson. This sent shares of Amgen up some 17 percent, while J&J shares fell a just a bit. The news bodes well for Amgen's research efforts and profitability.

The dispute centered on who owns rights to NESP, the next generation of the rapidly growing $3 billion anemia drug EPO. Expected to be on the market in 2000 or 2001, NESP should allow patients to take the drug only once a week, rather than three times. Marketing rights for EPO are currently split between the two companies through a 1985 agreement where Johnson & Johnson helped fund a then-upstart Amgen.

Considering that Amgen currently has a gross product margin of more than 86 percent, throwing an additional billion-dollar drug into the hopper means an extra $860 million dollars will be available to cover operating expenses and add to profits. Amgen's most significant operating expense is research and development, which gobbled up 28 percent of last year's product sales. With another blockbuster drug, Amgen can more aggressively develop new drugs. It will also have plenty of cash to help fund (and gain rights to) promising discoveries at smaller biotech firms that don't have strong cash flows. While there are still risks for final approval of NESP, the news is extremely positive for Amgen's long-term growth.


Foolish Trivia

I began as the Golden Rule dry goods store in Wyoming in 1902. A devout Baptist founded me. (An experienced traveler, he held tickets for the Titanic's second voyage.) I'm the nation's No. 4 retailer, with some 1,200 outlets bearing my name. I tried unsuccessfully to buy rival Dayton Hudson in 1996. In 1997, I bought the Eckerd chain and today operate nearly 3,000 drugstores. My general merchandise catalog business is the largest in the nation, processing some 65 million orders per year. Roughly one out of every four households in America has one of my charge cards. I also sell insurance. Who am I?

Answer: scroll way down...

J.C. Penney Co.
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