The Best Stock to Own

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?

A few ideas for you
Paying dividends to shareholders also forces companies to exercise fiscal discipline. That's great, because being flush with cash tempts managers -- let's face it, they tend to have big egos -- to bungle their loads. And even if they don't slip up, they tend to hoard that cash away from shareholders without putting it to any use. That's why Microsoft's long-anticipated one-time $3-per-share dividend payout meant so much to shareholders, and why cash hoarders such as Cisco Systems (Nasdaq: CSCO  ) are underserving their owners. (I love a good high-tech firm, but it's time to share the wealth, guys.)

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 stocks I'll share with you now.

Like Kraft, Heinz (NYSE: HNZ  ) has an enormous portfolio of well-branded products that a lot of people use. Its brand names include the obvious Heinz Ketchup, but they also include less obvious but highly popular names like Classico sauces, Bagel Bites, and Jack Daniels Grilling Sauces. Its yield isn't enormous, at 2.9%, but the company has been growing its dividend by 8% per year on average over the past three years.

NuStar Energy (NYSE: NS  ) is a limited partnership formerly known as Valero LP -- if bells are ringing, then you might be familiar with Valero Energy (NYSE: VLO  ) . NuStar, the limited partnership, was a 2001 spinoff from Valero and pays a handsome 5.3% dividend. The company operates more than 9,300 miles of pipeline from Texas to Minnesota and is a fantastic tax-advantaged investment. Though a bit rich these days, keep your eye on this winner.

Another name that you've come to see every day deserves a second look as an investment, and that's UPS (NYSE: UPS  ) . Although the company has seen a 12% slide over the past year versus the more modest 6% slide from rival FedEx (NYSE: FDX  ) , investors might be pleased to hear that value legend Warren Buffett has added Brown to Berkshire Hathaway's holdings. Of course, that's not enough to make a decision on, but along with a currently decent 2.4% dividend, the company has either increased or maintained its dividend for more than three decades. 

The Foolish bottom line
These stocks aren't companies that are perfect for everyone; 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 10 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, Heinz, and UPS are Income Investor recommendations. Microsoft and Berkshire Hathaway are Inside Value picks. FedEx is a Stock Advisor choice. The Motley Fool has a disclosure policy.


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