Do you have a "very best" stock? A stock that brings you closer to retirement year in and year out? One like Kraft Foods (NYSE: KFT), which -- tracked by Jeremy Siegel, author of Stocks for the Long Run -- 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. The rest comes from two magic words: dividend reinvestment.
Don't think these words are powerful? Take a ho-hum stock, or one that seems ho-hum, 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!
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. And 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 good 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 Amgen (Nasdaq: AMGN) and Electronic Arts (Nasdaq: ERTS) are underserving their owners.
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 that pay solid dividends, like the stocks I'll share with you now.
Like Kraft, Johnson & Johnson has an enormous portfolio of well-branded products that many people use. Its brand names include nutritional products Lactaid and Splenda; pain relievers Bengay, Motrin, and Tylenol; and health and beauty products Aveeno, Neutrogena, and Rogaine. At 3.1%, its yield isn't enormous, but its ability to generate free cash flow is impressive.
Speaking of companies with strong brands, I'm taking a hard look at Mattel (NYSE: MAT), which manufactures a portfolio of iconic toys, including Barbie, Hot Wheels, Fisher-Price, and Matchbox. The stock has been fairly volatile over the past few years, thanks to a string of product recalls in 2007 and dicey consumer demand of late -- but I think brighter days lie ahead as soon as consumer confidence rebounds. The 4.9% dividend yield makes the wait easier to bear. If you want to stay within the toy aisle, but aren't necessarily impressed with Mattel's product portfolio, you can also check out Hasbro (NYSE: HAS), a company sporting an impressive yield of 2.8%.
The semiconductor industry is an unusual spot to search for dividend payers, but Taiwan Semiconductor Manufacturing (NYSE: TSM) could be a profitable exception. This Taiwanese company is the best name in the semiconductor business, and with its high margins, solid balance sheet, and reasonably stable free cash flow, I think the 5.1% dividend yield is secure, despite our current economic malaise.
I'm not as sanguine about the prospects of our nation's financial systems, but I think there are banks in this country worthy of a second look. For example, I think BB&T (NYSE: BBT), with its sound credit quality and sexy 7.2% yield, is ready to buy.
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. 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 far more safely than others.
Looking for more stock ideas? Income Investor is beating the market by more than five 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 in this article. Microsoft is an Inside Value pick. Hasbro and Electronic Arts are Stock Advisor recommendations. Kraft, BB&T, and Johnson & Johnson are Income Investor recommendations. The Motley Fool has a disclosure policy.
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