Do you have a very best stock? A stock that brings you closer to retirement year in and year out? One like Kraft, formerly American Dairy Products, which -- as tracked back by Dr. Jeremy Siegel -- turned $1,000 into more than $2 million over 53 years with dividend reinvestment? In terms of returns, Kraft has quite literally been the very best stock of the past half-century.
I pay special attention to this stuff: My job is to find companies with that same magic that's made Kraft such a dynamite stock.
A repeatable fortune
What's the secret of Kraft's phenomenal digits? Well-branded products that a lot of people use, for starters. While that may be the bulk of it, those products aren't its only source of juju. The rest comes from two magic words: dividend reinvestment.
Don't think these words are powerful? Take a ho-hum stock -- or at least one that appears that way -- paying 5% in dividends yearly and racking up a modest 5% in capital appreciation. Start with $1,000 and reinvest those dividends. After 30 years, you'll have amassed a whopping $18,700!
The other side of the coin is that you could get those returns -- or better -- from a strong growth stock, but the dividend stock above gives you the flexibility to switch from reinvestment to an income strategy. In that example, you'd get almost $900 a year. Besides, which one do you think is the safer bet?
Four ideas for you
Paying dividends to shareholders also forces companies to exercise fiscal discipline. That's a great thing because being flush with cash tempts managers -- let's face it, they tend to have big egos -- to bungle their loads. And they do -- or at least they hoard them from shareholders without putting them to any use. It's why Microsoft's long-anticipated $3 dividend payout meant so much to shareholders, and why cash hoarders such as Starbucks (Nasdaq: SBUX ) and Oracle (Nasdaq: ORCL ) are underserving their owners. (I love my lattes, but it's time to share the wealth, Howard.)
So, in a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As the advisor of The Motley Fool's dividend stock newsletter, Income Investor, I'm always on the lookout for corporations paying solid dividends, like the three stocks I'll share with you now:
Like Kraft, Cadbury Schweppes (NYSE: CSG ) has an enormous portfolio of well-branded products that a lot of people use. The names include Mott's, Canada Dry, Trident, and many more. Its yield isn't enormous at 2.2%, but the company has grown its dividend 11% per year on average over the past 10 years.
Wrigley (NYSE: WWY ) is another branded blue-chip cash machine that's grown its dividend by more than 14% annually for the past decade. Of course, investors also pay up for that consistency. The stock currently trades at 28 times earnings, which makes it considerably more expensive than the broader market.
Deutsche Telekom (NYSE: DT ) is one of a number of large telecommunications companies offering attractive yields right now. In addition to a 4.9% yield, the stock will give you a hedge against the dollar and the potential for some growth in the T-Mobile brand. Of course, this is also an extremely competitive industry experiencing rapid changes in technology.
The Foolish bottom line
These stocks aren't recommendations; they're ideas to jump-start your research -- the best stock for you might not be the best for another reader. The bottom line is that in seeking great stocks for your portfolio, I invite you to give a close look to dividend stocks. They're appropriate for just about everybody. They're closet performers, and they tend to do their jobs more safely than others.
Looking for more stock ideas? Income Investor is beating the market by more than seven percentage points -- and I'm offering a free guest pass. Simply click here to learn more.
This article was originally published Nov. 14, 2006. It has been updated.
James Early does not own any stock mentioned in this article. Kraft and Wrigley are Income Investor recommendations. Microsoft is an Inside Value recommendation. Starbucks is a Stock Advisor pick. The Motley Fool has a disclosure policy.
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