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 the very best stock 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 Apple 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 paying solid dividends, like the stocks I'll share with you now.
Like Kraft, Pepsi (NYSE: PEP ) has an enormous portfolio of well-branded products that a lot of people use. Rival Coca-Cola (NYSE: KO ) may be the "real thing," but Pepsi has an incredibly robust portfolio of products, including Gatorade, Frito-Lay, Quaker Oats, and of course, Pepsi. At 2.9%, Pepsi's yield isn't enormous, but it's certainly a very solid business with great diversity.
Speaking of companies with strong brands, I encourage you to take a hard look at Clorox (NYSE: CLX ) , which manufactures not only its own highly recognizable brand of bleach, but also an entire portfolio of very recognizable cleaning agents. This is a very busy space with giants like S.C. Johnson and Colgate-Palmolive (NYSE: CL ) , but I believe Clorox has carved itself a great position with a suite of suitably differentiated products. There is plenty of growth here to look forward to, but the 3.3% dividend yield should make the wait that much easier.
You needn't limit yourself to the world of consumer staples if you're thirsty for some action. Examine PetroChina (NYSE: PTR ) , the biggest oil name in the exploding Chinese market. Like all the energy companies, the company has been battered to some extent since peak oil prices in 2008, but without doubt, the business remains the best-positioned to serve increasingly energy-thirsty consumers in the Forbidden Kingdom. Like competitors ConocoPhillips (NYSE: COP ) or Chevron (NYSE: CVX ) , PetroChina should benefit from a long-term increase in fossil-fuel demand. Plus, you'll be collecting a healthy 2.9% 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.