The most important dividend stock chart you’ve ever seen

Investing well can be difficult. Everyone who tries it wants to do well. Unfortunately, too many of us do poorly for a litany of reasons, including trading too often or looking for yield instead of steady payouts and returns. But individual investors can Succeed by following an effective and proven strategy: invest in high quality companies at reasonable prices, hold them for as long as possible and reinvest the dividends.

You don’t think this will work? Check out the following collection of dividend stock charts that highlight just how incredibly well this strategy can work.

The lesson this chart shows could help you turn around your investment results. Image source: Getty Images.

A simple chart that shows you the best way to invest well

There’s an old saying, this time in the market beats Hourly the market. This is true for almost all of us. The stock market, which is affected by the economy, investor sentiment, interest rates, inflation, and many other things, is essentially impossible to predict reliably by a day, a week, month or even year to year. But in the very long term, this volatility has proven to be a boon for investors, as the best companies grow with the economy, become more profitable, expand and increase their payouts to shareholders.

Since June 1988 (the oldest data available), the S&P500 has risen in value by 856% at the time of this writing, while total returns – which include all dividends paid – are 1,730%. Here’s what it looks like in real money returns:

Infogram

An investor in a low-cost index fund as one of three Vanguard 500 Index Fundss (NYSEMKT: VOO) (NASDAQMUTFUND:VFINX) (NASDAQMUTFUND:VFIA.X) would have captured returns very similar to this, turning $10,000 into $173,000 over 29 years and changing, with more than half including dividends.

This includes sitting on your hands and holding onto your investments through some of the worst times to be an investor: the dot-com bubble, 9/11, and even the Great Recession, weathering the worst, while still earning dividends ( and better yet, reinvest them).

It can work even better if you focus on the best individual stocks. Here are three — The Coca-Cola Company. (NYSE:KO), Nucor Corporation (NYSE: NUDE)and 3M Co. (NYSE: MMM) — that have generated crushing total returns in the market over the past 29 years:


Infogram

These three companies performed even better than the rest of the market over the same period, both in terms of stock price appreciation and total returns. Plus, these companies weren’t exactly start-ups trying to prove themselves in 1988 – they were market leaders with years of success behind them that would help pave the way for the decades that generated such wonderful returns for their investors.

Here’s how much better these top companies’ total returns have been over the past 29 years: While the S&P 500 generated a marvelous $173,000 for every $10,000 invested, 3M delivered $293,000, Coca -Cola has returned $349,000 to investors and Nucor Corporation has forged an incredible $429,000 in total returns since June 1988.

Just imagine how it can work if you steadily invest more money for years and years. This is how ordinary people become millionaires.

It should also be noted that none of these companies have ever been a particularly high yielding investment. Here is a snapshot of their returns over the past 29 years:

KO Dividend Yield (TTM) Chart

KO Dividend Yield (TTM) data by YCharts.

Except when their stock prices were hammered during and since the Great Recession, none of these stocks have ever paid a return higher than 4%, and generally they have paid returns closer to 2.5% or less. But all three have generated huge dividend growth over the very long term:

KO Dividend Table

KO Dividend data by YCharts.

Let time (and big business) do the work

The big conclusion is simple. You really don’t need to constantly tinker with your wallet. On the contrary, chances are that the more often you trade stocks, the worse your returns will be.

But if you invest in big companies with strong prospects and simply hold onto those investments for as long as you can, your returns will almost certainly improve. In the case of the three companies above (which I honestly chose to prove my point), you can not only outperform the typical individual investor who underperforms the market, but end up with returns that far exceed the market itself.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

Karen J. Nelson