Do you have a very best stock? A stock that brings you closer to retirement year in and year out? A stock like Kraft?
As tracked back by Jeremy Siegel, the company formerly known as American Dairy Products turned $1,000 into more than $2 million over 53 years, with dividend reinvestment. You might have guessed that General Electric or maybe AT&T
I pay special attention to this stuff. My job is to find companies possessed of the same magic that 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 Cisco
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, Walt Disney
But you needn't limit yourself to the world of the well known if you're thirsty for some action. Examine Cellcom Israel, a big name in the Israeli cellular market. Sporting a $3.0 billion market cap, the company certainly does not operate on the same scale as a Verizon
Finally, check out the world's steel businesses as a place for solid dividend income. The steel industry is a mature cash-rich business that should see some very intriguing growth in the future, despite short-term headwinds. Examine names like ArcelorMittal, with a 1.7% yield, and South Korean firm POSCO, a stock that yields 1.1% in addition to tremendous potential for capital appreciation. You can also examine the American firm Nucor
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.
Looking for more stock ideas? Income Investor is beating the market by five percentage points -- and I'm offering a free guest pass. Simply click here to learn more.
This article was originally published Nov. 14, 2006. It has been updated.
James Early does not own shares of any company mentioned. Kraft and POSCO are Income Investor recommendations. Walt Disney is a Stock Advisor and Inside Value recommendation. Microsoft is an Inside Value pick. Motley Fool Options recommended diagonal calls on Microsoft. The Motley Fool has a disclosure policy.
