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? You might have guessed the once unshakable General Electric
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 such as Adobe
In a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As the 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, Diageo has an enormous portfolio of well-branded products that a lot of people use. Its brand names include Guinness, Smirnoff, Tanqueray, and many more. The beverage industry is rife with competition from the likes ofAnheuser-Busch, Molson-Coors
But you needn't limit yourself to the world of consumer staples if you're thirsty for some action. Examine Cellcom Israel, a big name in the fast-growing Israeli cellular market. Sporting a $2.1 billion market cap, the company certainly does not operate on the same scale as players like Vodafone
The steel industry is a mature, cash-rich business where'd you expect regular payouts for your investment dollars. But the industry has gotten battered recently and global growth has come to a screeching halt. Despite this, you might want to consider mighty steel companies like Arcelor Mittal
Finally, check out Bermuda-based reinsurer Endurance Specialty. Though we love to hate many insurance companies these days thanks to the AIG
The Foolish bottom line
These companies aren't 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.
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James Early owns shares of Diageo. Kraft, POSCO, and Diageo are Motley Fool Income Investor recommendations. Microsoft is an Inside Value pick. Apple is a Stock Advisor choice. The Motley Fool has a disclosure policy.