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 that 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 a great thing because being flush with cash tempts managers -- let's face it, they tend to have big egos -- to bungle their loads. And they do -- or at least they hoard them from shareholders without putting them to any use. It's why Microsoft's long-anticipated $3 dividend payout meant so much to shareholders, and why cash hoarders such as Motorola
So, in a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As the advisor of The Motley Fool's dividend stock newsletter, Income Investor, I'm always on the lookout for corporations paying solid dividends, like the three stocks I'll share with you now:
Like Kraft, Kellogg's
The Foolish bottom line
These stocks aren't recommendations; 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 any stock mentioned in this article. Kraft is an Income Investor recommendation. Microsoft and Home Depot are Inside Value recommendations. The Motley Fool has a disclosure policy.