Question: Sara Decides to Take the Plunge
Sara Thomas is a child psychologist who has built a thriving practice in her hometown of Boise, Idaho. Over the past several years she has been able to accumulate a substantial sum of money. She has worked long and hard to be successful, but she never imagined anything like this. Even so, success has not spoiled Sara. Still single, she keeps to her old circle of friends. One of her closest friends is Terry Jenkins, who happens to be a stockbroker and who acts as Sara's financial advisor. Not long ago Sara attended a seminar on investing in the stock market, and since then she's been doing some reading about the market. She has concluded that keeping all of her money in low-yielding savings accounts doesn't make sense. As a result, Sara has decided to move part of her money to stocks. One evening, Sara told Terry about her decision and explained that she had found several stocks that she thought looked "sort of interesting." She described them as follows:
• North Atlantic Swim Suit Company. This highly speculative stock pays no dividends. Although the earnings of NASS have been a bit erratic, Sara feels that its growth prospects have never been brighter-"what with more people than ever going to the beaches the way they are these days," she says.
• Town and Country Computer. This is a long-established computer firm that pays a modest dividend yield (of about 1.50%). It is considered a quality growth stock. From one of the stock reports she read, Sara understands that T&C offers excellent long-term growth and capital gains potential.
• Southeastern Public Utility Company. This income stock pays a dividend yield of around 5%. Although it's a solid company, it has limited growth prospects because of its location.
• International Gold Mines, Inc. This stock has performed quite well in the past, especially when inflation has become a problem. Sara feels that if it can do so well in inflationary times, it will do even better in a strong economy. Unfortunately, the stock has experienced wide price swings in the past. It pays almost no dividends.
a. What do you think of the idea of Sara keeping "substantial sums" of money in savings accounts? Would common stocks make better investments for her than savings accounts? Explain.
b. What is your opinion of the four stocks Sara has described? Do you think they are suitable for her investment needs? Explain.
c. What kind of common stock investment program would you recommend for Sara? What investment objectives do you think she should set for herself, and how can common stocks help her achieve her goals?