The best stock

Q. What’s the overall best stock? — R.Y., Burley, Idaho

A.

There’s no single perfect stock, as different kinds of stocks can be particularly wellsuited to different investors’ needs. If you’re in or nearing retirement, for example, you might reasonably seek out dividend-paying stocks, while those aiming to beat the market might focus on finding undervalued stocks or attractive growth stocks for their portfolios. Risk-averse investors might favor established companies with dependable and growing revenue and earnings.

Remember that even if you identify what looks like a perfect stock, the unexpected could still happen.

Years ago, few would have ever expected to see Polaroid, Eastman Kodak, Toys R Us, Pan Am, General Motors, Chrysler, Woolworth’s, Texaco or Sports Authority file for bankruptcy or go out of business. That’s why it’s important not to put too many of your eggs in one basket.

There is one single investment you might consider, though — a simple low-fee, broad-market index fund, such as one that tracks the

S&P 500. It will immediately diversify your portfolio across many stocks.

Q. How can a company be “growing too fast to be profitable”? — C.D., Brookfield, Wisconsin

A.

It might be that the company is in a rapid growth phase and is therefore spending every dollar of income, and possibly even taking on debt, to fuel its growth. It might, for example, be spending a lot on hiring people, buying advertising or building more factories. This could work out if, over time, it spends less than it brings in and turns profitable. It’s not a guaranteed strategy, but it has worked for the likes of Amazon.com and others.

Nab dividend yield of 20% — or more!

If you’re not a fan of dividend-paying stocks, you should be: They can turbocharge your portfolio’s growth. Obviously they pay you income, typically on a quarterly basis. And they’ll also increase their payouts, typically annually. On top of that, these companies’ stock prices will also tend to rise over time.

It’s often underappreciated how much income dividends can deliver in the long run. You could end up with an effective dividend yield of 20% or more, for example.

Imagine that you buy 100 shares of stock in the Malodorant Deodorant Co. (ticker: EWWWW) at $100 each, for a total of $10,000. Let’s say that it pays out $4 per share in annual dividends when you buy your shares.

A dividend yield is the annual dividend amount divided by the current stock price. So dividing $4 by $100 gets you 0.04, or a yield of 4%. (The long-term median dividend yield of stocks in the S&P 500 is roughly 3%, by the way.) Your investment of $10,000 will generate around $400 in dividends in your first year.

Now let’s assume that Malodorant Deodorant increases its dividend payout by 6% each year. In 10 years, its $4 dividend will become $7.16. In 10 more years, it will be $12.83. Ten years after that, 30 years after your purchase, the dividend will pay $22.97. The stock itself will probably have increased in value, too. If it grows by 6% annually, it will go from $100 per share to $574 in 30 years. If someone buys a $574 share then and it pays a $22.97 dividend, their dividend yield would be (wait for it) 4%.

But for you — who bought your shares at $100 apiece — the effective dividend yield would be a whopping 23%. Divide the $22.97 dividend by your cost basis of $100 per share, and you get 23%. So from your original $10,000 investment, you’d be collecting around $2,297 per year.

Buying and holding great dividend-paying stocks is a powerful move.