How Did You Miss This Stock?

If you're a nerd like I am, then you've read your Jeremy Siegel research and can name the top-performing S&P 500 stock from 1957 to 2003. But if you don't know the name of that stock, see if you can guess it from the five hints below.

1. It was a "sin stock."
2. Thanks to perceived risks surrounding its core product, the stock was perpetually undervalued.
3. The company benefited from having a brand that remains one of the most-recognized in the world.
4. The company generated significant recurring cash flows.
5. It paid a dividend.

Can you guess?
It turns out that this super-stock delivered a near-20% annual return from 1957 to 2003, performance that would have turned a measly $1,000 into more than $4 million.

And the secret to getting this return, Siegel discovered, was a combination of hint No. 2 and hint No. 5. By taking the company's hefty dividend and reinvesting it in its perpetually undervalued shares, investors ended up really juicing their returns.

So what was the stock? You probably guessed that it was cigarette-maker Altria -- a stock that's still paying a greater-than-6% yield.

Yet even if you don't wish to own Altria -- given what it sells, some don't -- the lessons its stock teaches are relevant for everyone who seeks to make good money in the market.

Look for:

1. Undervalued stocks with ...
2. Strong brands that ...
3. Generate recurring cash flows and ...
4. Pay a rising dividend to shareholders.

A lineup of promising suspects
Our research team at Motley Fool Income Investor specializes in finding these types of stocks for their investors. While I can't give away their current picks, here are six stocks I know they're watching:

Data from Capital IQ, a division of Standard & Poor's.

They may not look exciting -- which may be why people miss them. But they share some key traits that make them excellent candidates.

First, because they're in mostly defensive industries like consumer staples, these companies generate sustainable cash flows. Second, as you can see in the table, these companies have demonstrated a commitment to rewarding shareholders by growing their dividends over time. And third, they all boast healthy yields that exceed the market average.

Pair those payouts with the chance that these stocks will rise over time, and you have a nicely defensive investment opportunity.

If you want more solid dividend stocks with significant total return potential, click here to join Income Investor as our free guest for 30 days. There is no obligation to subscribe, and you'll enjoy full access to all of the team's research and recommendations.

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This article was first published on Nov. 5, 2009. It has been updated.

Tim Hanson does not own shares of any company mentioned. United Parcel Service is a Motley Fool Income Investor pick. The Fool has a disclosure policy.