The 10 Best Stocks You Might Actually Buy

I'm easily obsessed with what I read. Too much Tom Wolfe and my sentences are paragraph-length head trips. If my bedtime stories come from Stephen King, it'll be a week of sewer-dwelling monster-clowns and the "coppery taste of blood and fear" on the back of my tongue.

Several months back, I was obsessed with something a bit less frightening. In fact, it was (and is) downright uplifting. I'm talking about the numbers in Jeremy Siegel's book The Future for Investors. In it, the man who's credited with "calling the top" of the Internet bubble -- the timing of which he maintains was luck -- demolishes many of the investing tropes that lose all of us both time and money.

One of the myths he puts to rest is that obscure, unheard-of stocks are necessary if you hope to trounce the wider market. This is simply not true. And that's especially good news, I think, because I have grave doubts about whether any of us can actually find the next big thing. Don't get me wrong -- I want to find it, too, but I'm a realist, and I think my odds of catching that train are low.

Siegel's wide-ranging analysis only reinforces that suspicion, scuttling the idea that blindly chasing growth -- in hopes that one or two big winners can make up for a pile of big risks -- will make you wealthy. (Turns out, when you toss a pile of spaghetti against the wall to see what sticks, most of it really does land on the floor. The one or two noodles that remain will not provide a meal.)

Leave those rocks where they are
Here's the most simple and powerful takeaway from Siegel's work: You don't have to look under rocks to find stocks that deliver rock-solid returns.

It's possible to generate market-beating gains with reliable, well-known companies ... the kind of stocks you might actually buy ... companies that won't give you an ulcer. Let's go to his numbers. Here are five of the top 10 "survivor" stocks of the original S&P 500, from inception until post-2000, with their average annual returns.

I find this list incredible because it shows the power of investing in well-known companies. None of these firms was a newcomer back in the 1950s. In fact, many of them were already decades old and world-famous when the index was created, yet they all provided market-whomping returns. How is that possible?

The secret sauce
Here's the secret: Those returns are calculated with dividends reinvested. In fact, as Siegel later explains, a healthy dividend, regularly redeployed, is the key to compounding average returns into long-term, market-beating gains.

This makes perfect sense. When strong companies suffer a down market, those dividends buy you more shares. When the markets readjust, you reap the rewards on more shares.

The longer I invest, the more I find myself adding these kinds of companies to my portfolio. Of course, being a value type, I try to buy them when they're cheapest, but I'm not afraid to pay up for quality. As the third column in the above table shows, premium companies always demand a bit of a premium price in the market. For what it's worth, these days I'm keeping my eyes open to add more shares of companies I consider to be consumer-brand powerhouses of the future -- though I'm stretching that definition a bit.

I think Whole Foods (NASDAQ:WFMI) is a prime candidate to become one of these long-term sleepers, particularly from recent prices. Ditto Chipotle (NYSE:CMG), which has a great business model and trades at reasonable prices. Are we looking at another McDonald's (NYSE:MCD) here? Probably not, but Chipotle doesn't need to get as big as its former parent to produce a great return for investors.

As retail's leading concept-based franchises continue to produce good cash flows, I'm even wondering if we can't see many years of consumer-brand type outperformance from the likes of Abercrombie & Fitch (NYSE:ANF) and Chico's FAS (NYSE:CHS).

I'm also taking a hard look at another sector that provided good, if uneven, performance by Siegel's numbers: energy. Big producers such as under-fire BP (NYSE:BP) stand to continue this streak, and I also think it's prudent to look to gas purveyors such as Chesapeake Energy (NYSE:CHK).

The Foolish bottom line
The lesson looks clear enough to me: Boring, already-well-known dividend payers can power your returns for decades. You don't have to give up your search for the next big thing, but keeping a strong portfolio foundation with stocks like these is the smartest way to play.

Their track record for performance makes them perfect for your tax-free retirement accounts, and as my colleague Robert Brokamp has discussed in his Motley Fool Rule Your Retirement service, a large stable of dividend payers means income without stock sales. (Let's face it, the best way to heat your house is not to burn the furniture.)

If you'd like to learn more about how dividend payers like these can help you retire in style, a 30-day guest pass to Rule Your Retirement is free. There's even a featured interview with Jeremy Siegel, where you can learn more about his research.

This article was originally published March 10, 2006. It has been updated.

Seth Jayson likes to see that cash. At the time of publication, he had shares of Chesapeake but no positions in any other company mentioned here. Chesapeake and Coca-Cola are Motley Fool Inside Value recommendation. Whole Foods is a Stock Advisor selection. Fool rules are here.