The Best Stock to Own

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 one of the very best stocks 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 Oracle (Nasdaq: ORCL) 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 investing service, Income Investor, I'm always on the lookout for corporations paying solid dividends, like the stocks I'll share with you now.

Like Kraft, Procter & Gamble (NYSE: PG) has an enormous portfolio of well-branded products that a lot of people use. Its brands include Pringles, Crest, Duracell, and Bounty. At 2.6%, its yield isn't enormous, but its ability to generate free cash flow is quite impressive.

Speaking of companies with strong brands, I'm taking a hard look at Mattel, which manufactures a portfolio of iconic toys, including Barbie, Hot Wheels, Fisher-Price, and Matchbox. The stock has been beaten down significantly in the past eight months -- even more so than competitor Hasbro (NYSE: HAS). But I believe brighter days lie ahead, as the company helps roll out products in partnership with DreamWorks Animation's (NYSE: DWA) monster Kung Fu Panda movie and the upcoming Dark Knight Batman film. The 4.2% dividend yield should make the wait that much easier.  

But you needn't limit yourself to the world of consumer staples if you're thirsty for some action. Examine Cellcom Israel (NYSE: CEL), a big name in the fast-growing Israeli cellular market. Sporting a $3 billion market cap, the company certainly is no Sprint Nextel (NYSE: S) yet. But with a 9% annual dividend yield, you can really afford to wait while the Israeli market matures.

The Foolish bottom line
These stocks aren't perfect for everyone -- they're just 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 more than seven 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 in this article. Microsoft and Sprint are Inside Value picks. Kraft is an Income Investor recommendation. Hasbro and DreamWorks Animation are Stock Advisor selections. The Motley Fool has a disclosure policy.