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 (Nasdaq: MSFT) long-anticipated one-time $3-per-share dividend payout meant so much to shareholders, and why cash hoarders such as Motorola are underserving their owners. (I love my cell phone, but Motorola is a case where Carl Icahn has it right.)
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, Kellogg's has an enormous portfolio of well-branded products that a lot of people use. The names include Eggo, Pop-Tarts, Frosted Flakes, and many more. Its yield isn't enormous at 2.4%, but the company has hiked its dividend 15% over the past two years.
Masco (NYSE: MAS) offers an array of household improvement products. The company's stock price seems to ride in correlation with the foreboding housing market, yet we think that the current $28 price tag and 3.2% yield, while not indicative of an undervalued stock, should improve with some patience. After all, Home Depot (NYSE: HD) accounts for some 20% of Masco's revenue. We always try to be extra wary when a company has so much riding on just one buyer.
SK Telecom (NYSE: SKM) is one of a number of large telecommunications companies offering attractive yields right now. In addition to a 3.2% payout, the stock will give you a hedge against the dollar and the potential for some growth in the company's Internet business. Of course, this is also an extremely competitive industry experiencing rapid changes in technology.
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 about six 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 shares of any company mentioned. Kraft and Masco are Income Investor recommendations. Microsoft and Home Depot are Inside Value picks. SK Telecom is a Global Gains choice. The Motley Fool has a disclosure policy.
Terms & Conditions
RSS Headlines
Fool UK