Our greatest glory is not based on having never failed but in his having raised every time we fell

To see just how much the market covets these stocks, look at two institutional indices of stable-growth companies. In early February, a Merrill Lynch portfolio of more than three dozen stable-growth stocks traded at 36 times earnings and about 11 times book value, or net worth. Morgan Stanley's index of 30 consumer-oriented stocks was valued at 30 times earnings and 6 times book. Despite the risks that accompany high valuations, there are compelling reasons to include stable-growth stocks in a portfolio. These stocks have outperformed the market over long periods; they deliver better returns than any other type of stock during an economic slowdown; and since they're companies worth holding on to, a portfolio of stable-growth stocks typically requires little trading activity, a distinct advantage for taxable accounts. On the other hand, if your marginal tax rate is low, investing in tax-exempt municipal bonds doesn't really make sense for you. If your marginal tax rate is 31 percent, earning 5 percent interest tax-free is like earning 7.25 percent in a taxable investment. If your marginal rate is only 15 percent, a tax-free 5 percent is worth only as much to you as 5.88 percent in a taxable investment. You might earn more in Treasuries, which are free of state and local taxes-and safer than municipal bonds.




Smart Questions to Ask Your Financial Advisers Smart Questions to Ask Your Financial Advisers Despite the risks that accompany high valuations, there are compelling reasons to include stable-growth stocks in a portfolio. These stocks have outperformed the market over long periods; they deliver better returns than any other type of stock during an economic slowdown; and since they're companies worth holding on to, a portfolio of stable-growth stocks typically requires little trading activity, a distinct advantage for taxable accounts.

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What's so special about a company that peddles cookies and aspirin? Regardless of whether the economy is booming, busting, or doing something in between, people get hungry and have headaches. At Walgreen stores, the product keeps moving off the shelves. Businesses that sell things people desire or need no matter how the economy is faring are known as stable-growth companies because they're able to deliver steady profit increases year after year. Although examples exist within many areas of commerce, Wall Street has traditionally defined stable-growth companies as those producing beverages, food, pharmaceuticals, and tobacco-staples that consumers keep buying in good times and bad. And here's another Wall Street tradition: Once a maker of one of these products starts showing dependable earnings growth, its stock often richly rewards investors who hold on for the long term. What's my marginal tax rate? Steve Kim, an equity-derivatives analyst at Merrill Lynch, has closely studied the past performance of stable-growth stocks. Kim compared the returns of the 500 largest-capitalization companies with a portfolio of stocks with the lowest volatility in earnings in the food, drugs, and tobacco industries. His research showed that the stable-growth stocks outgained the 500 large caps by 2.25 percent a year from January 1970 to February 1996, with only slightly more risk. February 24 2003 This is important information for any investor-even someone who never ventures into the stock market. For superior long-term performance, shop the market for food, drug, and beverage stocks

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Smart Questions to Ask Your Financial Advisers Smart Questions to Ask Your Financial Advisers What's my marginal tax rate? What's my marginal tax rate? The 98-year-old retailer has seen its earnings increase in each of the past 24 years. In the past five years, the company's earnings per share have nearly doubled. No wonder investors have flocked to Walgreen, sending its stock up 88 percent last year; during the past decade, shareholders have earned about 30 percent annually. Walgreen's stock traded at 56 times earnings in early February, a multiple 66 percent higher than the average Standard & Poor's 500 stock, which itself carries near-record price-to-earnings ratios. More... Food Comfort For Your Portfolio

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The U.S. economy may not have to nosedive for stable-growth stocks to come back in vogue. A slight change in investors' perception could do the trick. The economy grew 3.8 percent in 1997 and 4.1 percent last year. Most Wall Street economists expect about 2.5 percent growth this year. Though this is a reasonable level by historical standards, it could be enough of a change to alarm investors. Chicago Fed president Michael Moskow refers to this possibility as the Sammy Sosa syndrome. "For years, Sammy Sosa hit 30 to 40 home runs, a good performance," Moskow said in a speech this January. "Last year, he hit 66-an extraordinary performance. If he hits 40 this year, some will say he had a bad year. It's a case of unrealistically high expectations." Stability is not growth If you and your spouse have $98,000 a year in combined income, you may think that you're in the 31 percent federal tax bracket. The reality is more complex: you pay a 31 percent federal income tax only on the last $1,100 you earn. In fact, your marginal tax rate is 31 percent, but most of your income is taxed at 15 percent or 28 percent. Moreover, when Kim measured the return of stable-growth stocks and the broader market in different phases of the economic cycle (recession, recovery, and expansion) during the 26-year time frame of his study, the results were impressive. Stable-growth stocks had higher returns than the 500 largest stocks during periods of recession and expansion. In fact, the only time these stocks trailed the broader market was during times of recovery, when investors chased companies more likely to profit from an expanding economy.

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