Do you have a very best stock? A stock that brings you closer to retirement year in and year out? One like Kraft (NYSE: KFT ) , 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 (Nasdaq: MSFT ) long-anticipated one-time $3-per-share dividend payout meant so much to shareholders, and why cash hoarders such as Sun Microsystems are underserving their owners. (I love a good 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, Cadbury Schweppes (NYSE: CSG ) has an enormous portfolio of well-branded products that a lot of people use. Its brand names include some of the more obvious beverages like Schweppes Ginger Ale, 7-Up, Snapple, and Hawaiian Punch. But they also include the robust confectionary line of candies, chocolates, and various gum makers. Its yield isn't enormous, at 2.0%, but alongside its decent dividend it has returned 12% per year to investors over the past five years. And that is impressive.
Southern Copper (NYSE: PCU ) , a stock I personally own, sports a yield north of 7.0%. But it's not for the faint of heart. This Arizona-based company (majority owned by Grupo Mexico) runs mining operations in Mexico and Peru. The yield is great, but the company is exposed to volatile metal prices.
American Capital Strategies (Nasdaq: ACAS ) yields a nice 7.8% and has done well for its shareholders over time. American Capital is a business development company that funds private equity investments. While this can be lucrative, the risk here is that it's hard to know the precise value of its investments -- not a stock for widows and orphans.
PetroChina (NYSE: PTR ) is a mothership oil and gas company in China yielding around 3.2%. Of course, a huge risk inherent in any Chinese company is that it's, well, a Chinese company. The upside is that darn near everybody agrees that oil and China in the same equation could yield some good returns.
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.
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This article was originally published Nov. 14, 2006. It has been updated.