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? You might have guessed General Electric (NYSE: GE ) , but in terms of returns, Kraft has been among the very best stocks of the past half-century.
I pay special attention to this stuff: My job is to find companies with the 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 Apple -- which has more than $24 billion in cash -- are underserving their owners. (I love my iPod, 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 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 has an enormous portfolio of well-branded products that a lot of people use. Its brand names include Guinness, Smirnoff, Tanqueray, and many more. The beverage industry is rife with competition from the likes of Anheuser-Busch, Molson Coors (NYSE: TAP ) and others, yet Diageo's strong array of premium products allows it to thrive in the business. The company has a nice 5.1% yield, and it's increased distributions every year since 1998.
But you needn't limit yourself to the world of consumer staples if you're thirsty for some action. Examine Cellcom Israel (NYSE: CEL ) , a big name in the Israeli cellular market. Sporting a $2.9 billion market cap, the company certainly does not operate on the same scale as Vodafone (NYSE: VOD ) . But with an 11% annual dividend yield, you can really afford to wait while this company continues to grow.
The steel industry is a mature cash-rich business where'd you expect regular payouts for your investment dollars. But many large firms, like ArcelorMittal (NYSE: MT ) , are relatively thrifty with their cash. Not so with South Korean firm POSCO (NYSE: PKX ) , a stock that yields 6.1% in addition to tremendous potential for capital appreciation.
Finally, check out Bermuda-based reinsurer Endurance Specialty. Like competitor Montpelier Re (NYSE: MRH ) , the company generates a ton of upfront cash. Today, Endurance is well positioned financially and operationally. Even better, it yields 3.6% and shows decent forward growth prospects.
The Foolish bottom line
These companies aren't 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.
This article was originally published Nov. 14, 2006. It has been updated.
James Early does not own shares of any company mentioned. Kraft, POSCO and Diageo are Income Investor recommendations. Apple and Montpelier Re are Stock Advisor recommendations. Montpelier Re is also a Motley Fool Hidden Gems selection. Endurance Specialty and Microsoft are Inside Value picks. Kraft and Diageo are Income Investor recommendations. The Motley Fool has a disclosure policy.