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Originally published Saturday, February 2, 2013 at 3:48 PM

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The Motley Fool: Company's acquisition doesn't guarantee improved stock price

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Q: When a company is acquired by another, does its stock price always go up?

A: It depends. If the firm’s market value is around $10 billion and it’s bought for $15 billion, the stock price may jump on the news.

When a company is very desirable, perhaps due to its products or growth prospects, a buyer may have to outbid other interested companies. But if it’s struggling, it might get scooped up for a song, when its price is depressed.

Meanwhile, if investors think that the acquiring company has struck a good deal, its own price might also rise. But if they think it overpaid or won’t see a good return on the investment, its price can drop.

Big blue-chip companies such as General Electric and Corning are exciting not just because of their businesses, but also because of their dividends.

If you buy into a healthy company when its dividend yield (annual dividend divided by share price) is 3 percent, you’re likely to get that payout every year, regardless of what happens to the stock price.

Here’s something investors rarely consider. Imagine you bought 10 shares of a company for $100 each, and it pays a 3 percent dividend. With a $1,000 investment, that’s an annual payout of $30. Not bad.

But dividends aren’t static and permanent. Healthy companies raise them regularly. A few years down the line, perhaps the company is trading at $200 per share. Imagine that its dividend yield is still 3 percent, as its dividend has been gradually raised to $6 per share. Note that $6 is a 3 percent yield for anyone buying the stock at $200, but since you bought it at $100, to you it’s effectively a 6 percent yield.

By holding on to many great dividend-paying companies, you can enjoy rising dividend yields over time.

Dear Fool: My dumbest investment was when I bought shares of Ambac Financial. It turned out to be my best lesson on the dangers of “emotional investing.”

I thought I was catching it on the upswing, but I ended up getting an upper cut instead, as it fell faster than I could regain my balance.

I quickly realized that the market reacts much faster than I can, and a sure-footed investment strategy is a much better plan.

The Fool responds: This bond insurer ran into trouble in 2007, largely due to involvement in mortgage-related securities, and filed for bankruptcy protection in 2010. Many people bought shares as they fell, not imagining that the shares could fall further.

It’s true that some stocks plunge and then recover well, rewarding shareholders. But many do not. If a company runs into trouble, consider steering clear.

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