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 quite literally 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 like Oracle (Nasdaq: ORCL ) are underserving their owners.
In a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As 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, Procter & Gamble (NYSE: PG ) has an enormous portfolio of well-branded products that a lot of people use. Its brands include Pringles, Crest, Duracell, and Bounty. At 2.9%, its yield isn't enormous, but its ability to generate free cash flow is quite impressive.
Speaking of companies with strong brands, I'm taking a hard look at Mattel, which manufactures a portfolio of iconic toys, including Barbie, Hot Wheels, Fisher-Price, and Matchbox. Competitor Hasbro (NYSE: HAS ) generates a lot of press with its production deals and headline brands like Transformers. But I believe Mattel has the stronger position of products and is greatly situated on its own to market them with A-list partners like Dreamworks (NYSE: DWA ) . The 3.7% dividend yield should make the wait that much easier.
But you needn't limit yourself to the world of consumer staples if you're thirsty for some action. Examine StatoilHydro (NYSE: STO ) , a big-name in North Sea energy exploration and distribution. The company is still significantly off peak oil prices of 2008 and remains well-positioned to serve energy thirsty consumers in Norway, the U.S., and the rest of Europe. Like competitors BP (NYSE: BP ) or ExxonMobil (NYSE: XOM ) , StatoilHydro should benefit from the long-term increase in fossil-fuel demand. Plus, you'll be collecting a healthy 2.7% dividend yield along the way.
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.
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. StatoilHydro is an Income Investor recommendation. Microsoft is an Inside Value pick. P&G and Kraft are Income Investor recommendations. Hasbro and DreamWorks are Stock Advisor selections. The Fool owns shares of Hasbro and P&G. The Motley Fool has a disclosure policy.