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 been one of the very best stocks 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 Google (Nasdaq: GOOG  ) are underserving their owners. (I love the search engine, but it's time to share the wealth, guys.)

In a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As co-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, Diageo (NYSE: DEO  ) has an enormous portfolio of well-branded products that a lot of people use. Its brand names include Guinness, Smirnoff, Tanqueray, and many more. Its yield isn't enormous, at 3%, but the company has increased its distributions every year since 1998.

Endurance Specialty (NYSE: ENH  ) is a Bermuda-based reinsurer. The company showed volatility during the months following Hurricane Katrina, but Endurance has put forth a strong showing in the years since. Today, Endurance is positioned well financially, has demonstrated good operational practices, and yet has been battered thanks to the overall slow-down in the insurance industry. I'm not certain this is a best-in-breed firm like Markel (NYSE: MKL  ) , but don't discount Endurance forever. The stock yields 3.2% and should capitalize on industry upswings.

Public Storage (NYSE: PSA  ) is a $13.6 billion REIT that specializes in storage rental space. While the company has been hit hard since the subprime fallout, it still shows fairly strong top-line growth and maintains a portfolio of properties that should carry on just fine in the long term despite today's real estate malaise. Storage is a big business, with companies like Mobile Mini (Nasdaq: MINI  ) and U-Store-It (NYSE: YSI  ) picking up different ends of growing demand. But in the end, Public Storage pays a respectable 2.7% dividend and should grow well in the years to come.

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 eight 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 Diageo are Income Investor recommendations. Endurance Specialty, Microsoft, and Markel are Inside Value picks. Mobile Mini is a Stock Advisor recommendation. Google is a Rule Breakers pick. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 05, 2008, at 10:33 AM, daknyc wrote:

    Full Disclosure: I own DEO.

    Diageo is a world class company, and at a 15 p/e is inexpensive.

    Diageo has 9 out of the top 20 spirit brands in its portfolio, geographic and currency diversity, an understanding of the developing markets that is second to none, and is the only company with its own distribution in the US. The latter has been achieved (despite the mandatory three-tier system in the US) by mandating that its wholesalers create their own sales division to be used exclusively for Diageo. This gives them wholesaler share of mind that no other company can claim.

    Smirnoff, Bailey's and Johnnie Walker are all tops in their categories and they continue to grow. Further, their Innovations Division has also seen success investing in new brands, such as Nuvo, which is catching on in the mulit-cultural market.

    Mark my words, DEO will be at $90 by March 31, 2009.

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