The Fool’s Take
When food manufacturer Kraft merged with condiments titan Heinz in 2015, it created Kraft Heinz, one of the world’s largest consumer goods companies. The new company started off with a strong dividend plan, and payouts increased in each of the first three years — but then Kraft Heinz slashed them to the bone.
Some of its splashy food-brand buyouts turned out to be less profitable than expected, forcing the company to conserve cash with a stricter dividend policy. Its quarterly payouts have been stuck at $0.40 per share since the start of 2019. Yet Kraft Heinz’s yield has surged recently, despite that unchanging amount. Why? Because the stock price has fallen in the last two years, even though the underlying business has seen free cash flow — the lifeblood of those dividend checks — increase over that same period.
The stock is arguably cheap for good reasons. Inflation fears have limited Kraft Heinz’s pricing power in recent years, and many store chains have developed fresh competition in the form of high-quality store brands. But the share-price drop seems much too steep.
The stock was recently trading at a price-to-earnings (P/E) ratio of 12.8, well below its five-year average of 21.6. Kraft Heinz isn’t going out of business anytime soon, and buying now could be a smart move, locking in a strong dividend yield (recently 6.2%) for the long haul.
Ask The Fool
From C.J., Dallas: One of my stocks has been falling. Should I buy more of the now lower-priced shares?
If you do, you’ll be “averaging down,” meaning you reduce the average price you paid for your shares by buying additional ones at lower prices. That can work well sometimes — perhaps in a big market pullback (when the stock has fallen through no fault of its own), or if the market has overreacted to some development concerning the company.
Averaging down, also known as “buying the dip,” can be disastrous, though, if the stock has been dropping for good reason and isn’t likely to recover any time soon. Dig deeper into the situation before buying. You might want to sell instead, or perhaps just not buy any more shares.
From B.V., Sebring, Fla.: Are marijuana exchange-traded funds (ETFs) good investments?
Many marijuana stocks and funds have performed poorly. But if you’re bullish on the future of marijuana (cannabis) stocks and you’re not sure which companies will end up on top, investing in a cannabis-focused ETF might be a good strategy.
The ETF will distribute your dollars across multiple companies in or related to the industry, such as marijuana cultivators, retailers, owners of dispensary real estate and more. Research the industry first, to determine how financially promising you think it really is.
The cannabis industry is projected to grow from $44 billion in 2022 to $444 billion by 2030, according to Fortune Business Insights. Cannabis companies face regulatory risks and financing challenges, though, so nothing is certain.
There are multiple cannabis-focused ETFs to choose from, but most are relatively young and small. You might consider other, less risky industries to invest in.
The Fool’s School
It’s good to understand what bonds are and why you might want to own some. Bonds are essentially loans from investors to companies or governments. For example, the U.S. Department of the Treasury borrows money by selling bonds known as “Treasurys.” State and local governments issue municipal bonds, and businesses issue corporate bonds.
Healthy companies can offer bonds with lower interest rates, while businesses with poor credit ratings must offer higher interest rates on their “junk” bonds to attract more risk-tolerant buyers.
Bondholders typically receive regular interest payments from the issuer at a stated “coupon rate.” For example, a $1,000 bond with a coupon rate of 5% will pay $50 per year. When the bond matures, its “par value” of $1,000 will be repaid.
Most bonds have maturities in a range of one year to 30 years. (Many bonds are “callable,” meaning that the issuer might opt to pay back the principal early.) You can buy a bond when it’s issued and hang on through maturity, but you don’t have to, as bonds can be traded between investors. Bond prices change as prevailing interest rates change. The price of a 4% bond will fall, for example, if interest rates rise and 5% bonds become available. When interest rates fall, existing bonds with higher interest rates will be in higher demand, so they’ll cost more to buy.
Your money is more likely to grow faster invested in stocks than in bonds, but many people still buy bonds (or bond funds) for diversification. According to the folks at Darrow Wealth Management, between 1997 and 2024, the U.S. Aggregate Bond Index averaged annual gains of 4.1%, versus 9.7% for the S&P 500 index of 500 stocks (both figures include reinvested dividends).
Of course, the stock market is volatile, and those gains are never guaranteed. If stocks crash, your bonds may keep your portfolio’s value from falling too much (and prevent you from having to sell stocks for retirement income in a declining market).
Learn more before jumping into either stocks or bonds.
My Smartest Investment
From N.W., online: My smartest investment was investing in prepaid college tuition.
The Fool responds: Well done! That’s a smart investment indeed for many people — but not necessarily everyone, as there are some drawbacks to prepaying tuition. For those who don’t know, there are two types of tax-deferred “529 plans” — one is a savings plan through which you can save and invest money for future educational expenses, and the other is a prepaid tuition plan.
Prepaid tuition plans vary by state, and recently, only nine states offered them. They allow you to make payments toward tuition at a specified college or college system at today’s locked-in cost. So while the cost of college tuition might surge (and it grew by around 900% from 1982 to 2024), you’ll only have to pay the lower cost that existed when you set up your prepaid tuition account.
Key downsides to these plans are that they don’t apply to any college or university your child might want to attend, and they typically cover only tuition and fees — not room and board, books or other costs. Anyone interested should read up on the pros and cons and other details regarding these plans. They’re definitely worthwhile for many people.
(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)
Who Am I?
I trace my roots to 1957, when my founder bought a motel next to a Los Angeles airport. He and other family members helped grow me. In 1968, a separate internationally focused company was formed, and in 2004, I absorbed it and several other family businesses.
Today, based in Chicago and with a recent market value near $14 billion, I’m a major hospitality specialist, recently sporting more than 1,450 hotels and resorts in 79 countries — with close to 350,000 rooms in all. One member of my founding family is the billionaire governor of Illinois.
Who am I?
Forget last week’s question? Find it here.
Last week’s answer: Walt Disney Co.
