The Best Benchmark Stock of All

benchmark stocksA company like Caterpillar Inc. (NYSE/CAT) has got to be one of the ultimate benchmark stocks to follow. If business is good in the global economy, so is business at Caterpillar.

This stock is hitting new 52-week highs, and it has been a tremendous wealth creator since the financial crisis in stocks ended. I wouldn’t be surprised if the company split its shares two-for-one in the near-future. Recently, the company issued bonds to Chinese investors in renminbi-denominated currency.

Caterpillar is one of my all-time favorite benchmark stocks to follow. I wouldn’t buy the shares at their current price, but I would if there was a major correction. The shares have been a consistent performer for quite a long time.

This stock is a great barometer on the domestic economy and in emerging markets, because industry needs construction and mining equipment. The company’s business is growing in almost every market and, in the last month, a number of Street analysts raised their earnings expectations for the fourth quarter, all of 2010 and all of 2011. This stock’s outperformance is definitely contributing positively to the performance of the Dow.

From the mid-70s to the mid-90s, Caterpillar’s stock price didn’t do much but pay dividends to shareholders. Then, as if a switch was flipped, the business took off and so did the share price. Over the last 15 years, this stock has been a powerhouse wealth creator and it’s done so because of growing demand from China, India, the Middle East, and the mining industry. All four of these important factors have contributed to making this large-cap business a growth stock, just like a small-cap technology flyer. It’s been the best of both worlds for shareholders in CAT.

I always have a dozen or so benchmark stocks that I follow just to help hone my own stock market view. Stocks go up for a reason and, while investor behavior is often irrational, the long-term trend usually is not.

I’m absolutely convinced that an equity investor can do just as well by owning the right large-cap, dividend-paying shares as they can speculating in smaller companies. It’s taken a number of years for me to learn this, but I know it to be true.

The key with large-cap investing is all about your entry point and this means that you have to wait until there’s some major catalyst (like a financial crash or correction) to get in at an attractive price. A smaller company can have the greatest new technological invention, but nothing beats a long track record of earnings and dividend growth from a big, global company. At the very least, you can sleep better owning shares in a big brand-name company over a smaller business.