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 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 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 3.4%, but the company has a strong history of increasing its dividends.

Endurance Specialty (NYSE: ENH  ) is a Bermuda-based reinsurer. The company is positioned well financially and has demonstrated good operational practices, yet has been battered thanks to the overall slowdown 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 4.5% and should be able to capitalize on industry upswings.

Finally, I’d like to call out a pair of attractive foreign telecom properties. America Movil (NYSE: AMX  ) is one of two dominant names in the Latin American wireless business. It’s poised to grow for years to come and already sporting a solid 2% dividend yield, and it might be a good way to grab a piece of developing South America. And speaking of developing regions, Telkom Indonesia (NYSE: TLK  ) is a company marked for tremendous growth. With an already robust dividend of 6.4%, the dominant name in Indonesian wireless is poised to explode as cellular adoption takes off in the world’s fourth most populous nation. With significant growth on the table and solid dividends already in the mix, both companies make their stateside peers, like AT&T (NYSE: T  ) , look like less attractive opportunities. 

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? Eighty percent of the stocks in Income Investor are beating the market, and I'm offering a free guest pass for you to check it out. 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, Diageo, and Telkom Indonesia are Income Investor recommendations. Endurance Specialty, Microsoft, and Markel are Inside Value picks. America Movil and Telkom Indonesia are Global Gains recommendations. Google is a Rule Breakers pick. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 06, 2009, at 4:58 PM, fly4umilehigh wrote:

    I can't believe that you are dissing AT&T.... they are a GREAT company with solid financials and secure dividend. Couldn't you have picked a company more fitting to your thought process? What is your rational? The more I read from Motley fool, the more I decide "not-to-read" anymore from Motley Fool.

  • Report this Comment On March 07, 2009, at 6:23 AM, sylvia07 wrote:

    What was the name if the stock they say, you should own?

  • Report this Comment On March 09, 2009, at 12:11 PM, VetteFever wrote:

    Fly, I'd hardly call a company like T a 'great' company. Looked at that balance sheet lately? $73 Billion in debt, paying out 75% of earnings in a dividend and quarterly earnings declining 25% year over year. With their customer service, it's no wonder I might add. Their customer service makes AOL and Time Warner's look great. Good luck, but I'd think about it...

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