The Gift That Keeps on Giving: Stock or Fund Shares, With a Warning Not to Sell
Today, I still have the original, beautiful, crinkly certificate--and more. Through stock splits, my one share of Ford has become 16 shares. My grandfather’s gift, which cost about $60, is now worth $560. It could have been worth more than $2,000 if I had reinvested the quarterly dividends in new shares of Ford instead of squandering them on baseball cards and movie tickets.
But the money isn’t the main point. It was a wonderful gift that I haven’t forgotten. My own experience with Ford is one reason I suggest giving shares of stock--or mutual funds--as presents to young people graduating from high school or college or getting married or having a significant birthday.
Gifts of stock should always come with an admonition, a note to the recipient that says: “Promise you won’t sell this stock for at least 20 years. You’ll be tempted at times, but you’ll be glad you kept it.”
With this pledge secured, you can buy shares (or funds) for the long term. You can take either of two distinctly different approaches: Buy young, exciting growth companies. This is the strategy recommended by Standard & Poor’s Corp., the research and ratings firm, in an article titled “Stocks for Different Times of Your Life” in the S&P; newsletter, Investor’s Monthly. Stocks for “singles” and “young marrieds,” says S&P;, “generally have stronger growth potential and therefore carry higher P/E [price-to-earnings] multiples and offer little or no current income.”
A typical stock in this category is Bay Networks Inc., a company created in 1994 with the merger of two high-tech firms, SynOptics and Wellfleet, which were each less than 10 years old. They make high-speed routers, software and other computer network devices.
The earnings of the two parts of Bay Networks have, on average, doubled annually since 1991, and shares trade at a P/E ratio of 28. In other words, for every dollar of profit anticipated this year, a new investor has to pay $28. That’s about 50% more expensive than the average stock. Also, Bay Networks pays no dividend; it plows all its earnings back into the company.
High-growth stocks such as Bay Networks, Cisco Systems Inc. and Infinity Broadcasting Corp. (all recommendations of S&P;) tend also to be highly volatile, rising sharply in some years, falling sharply in others. Short-term investors can’t tolerate this kind of risk, but investors who won’t cash in for at least 20 years can--and should.
Small-company growth stocks have produced average annual returns of more than 12% since 1926, according to Ibbotson Associates, a Chicago research firm. If you keep reinvesting the profit and dividends at that rate, your investment will double every six years. In 24 years, $1,000 turns into $16,000.
More important, over time, the volatility of small stocks smooths out, and they’re no more risky than large stocks, or even bonds. For instance, small stocks have produced returns averaging at least 10% in 45 of the 47 20-year periods since 1930 (that is, 1930-’50, 1931-’51, etc.). In the other two periods, the stocks returned 8.2% and 9.5%. Past performance is no guarantee of future results, but this is a pretty spectacular record.
Buy blue-chip companies. These are firms that have been around for a long time and can be expected to be around longer. Ford Motor Co., which was already 53 years old when my grandfather bought me that share of stock, is a good example. So is General Electric Co., which was one of the original stocks in the century-old Dow Jones industrial average.
These established companies usually pay decent dividends, which, when reinvested in the stocks that spawned them, can produce huge gains over time. For example, a gift to a 1980 graduate of two shares of GE, costing a total of $100, is now worth $2,000--and half of that gain is because of dividends.
Another idea is to give the Dow itself, or a piece of it. Like several other large investment firms, Dean Witter Reynolds Inc. offers unit-trust portfolios (like mutual funds but run on a formula rather than the whim of the manager) based on the Dow. One contains the 10 Dow stocks with the highest dividend yields, another the five lowest-priced stocks among those 10 high-yielders (the “Low-5”). The portfolios are adjusted every year.
My own preference for graduates is something in between small-growth stocks and blue chips: technology and consumer companies that have shown an ability to adapt to changing markets.
A favorite example is Motorola Inc., founded in 1928 to produce mobile radio receivers for the police and military. Motorola moved into (and out of) television, car radios and eight-track tape players. Today, the firm is the world’s largest cellular phone maker and a power in semiconductors. What will Motorola be doing in 20 years? I haven’t the slightest idea, but I’d like to be an investor in whatever it is.
Another approach is to buy mutual funds with a long-term horizon. One fund in particular is made for giving. In fact, the fund, Twentieth Century Giftrust Investors ([800] 345-2021), won’t allow you to purchase shares for yourself or your spouse. You have to buy them for someone else, and the recipient has to keep them for 10 years or (if a child) until he or she reaches majority--whichever is longer.
The fund has a fabulous record: an average annual return of 22% over the last 10 years, compared with 14% for the S&P; 500-stock index. The managers buy growth stocks and hang on for what can be a wild ride. The average company they own has a market capitalization of only $400 million, a lofty P/E of 39 and sizzling annual earnings increases of 53%.
