Dividend investing is quite fun. But you still need to keep your feet on the ground and follow the numbers, logic and not emotions. But some principles are hard to grasp, so it's better to see them clearly on a chart. And that is why I bring you a few of them!

Reinvestment works wonders

Dividend reinvestment plays a vital role in maximizing long-term returns from stock investing. It allows you to benefit from the principle of compound interest, where newly purchased shares generate an additional dividend for you to reinvest. This triggers the snowball mechanism.

As a result, the overall value of a stock portfolio can grow at an exponential rate, especially if the company increases dividends at a faster rate. Through reinvestment, even a small dividend can dramatically increase the value of the overall investment over decades through leverage. Interest accumulation works best at the beginning of the investment period.

Reinvestment also allows you to maintain your original strategy without having to sell shares, and there are no sales charges or taxes. The stock market also tends to grow at a higher rate than dividends over the long term, so reinvesting allows you to benefit from the potential of the overall stock valuation. For these reasons, dividend reinvestment is essential to maximizing long-term stock returns. You can see this for yourself in the chart below.

Yield is not everything!

Stocks with the highest dividend yield provide less attractive risk-adjusted returns over the long term .

Professor French's data shows that the cumulative total return of portfolios grouped by dividend yield declines significantly for the highest yielding groups. Simply put - the higher the yield, the more likely you are to come out worse off in the end.

Instead, investors should focus on fundamental analysis and check how far its profitability can sustain dividend payments and growth over the long term. Otherwise, dreams of higher yields risk masking the risk that a poor financial situation will lead to stagnant or reduced dividends in the future. A high yield is useless when share values are falling.

Dividend yields are important, but should not be the primary criterion for stock selection. In the theoretical examples, the stocks with the highest dividend yields look attractive, but the chart says otherwise.

The average yield has stabilized

The average dividend yield of the S&P 500 has remained around 1.8% for several years due to some stability in dividend payments by the companies included in the index. Companies tend to track growth more than absolute dividend levels, so the average yield has not changed dramatically.

While some sectors have shown higher dividend growth, others have seen their dividends decline or stagnate. At the level of the overall index, this partially evens out. Despite earnings growth, some companies are reinvesting in their growth and buying back shares rather than paying higher dividends.

Companies' shares trade at different price multiples, which affects their dividend yields differently. At the level of the overall index, this effect is again counterbalanced. The entry of new firms typically has little effect on the average dividend yield, as they are often similarly sized firms with similar dividends.

High dividend and high payout ratio

The highest dividend stocks are often high payout ratio stocks - they distribute a high proportion of their earnings as dividends. Many of them also pay out a higher proportion of their earnings than in the past to maintain their dividends. Neither of these may be sustainable. A high yield today can easily turn into a low yield tomorrow.

However, not all high yield stocks fall into this problem area. There are many companies that, at a similar or lower payout ratio, pay a higher yield than the market, presenting a potentially more attractive option. This is shown in the following chart.

The greater the fear, the greater the turnover

Historical downturns have not been pleasant, but each of these major crashes saw double-digit returns in the 12 months following the crisis. Of course, no one is guaranteeing that won't change. And it's also good to remember that while the market usually recovers from these downturns, it's not a bad idea to prepare for crises.

The Great Depression of the late 1920s, which had stock market declines of up to 80-90%, was followed by a strong rally in the 1930s, when stocks recovered most of their lost value. The market recovered to its pre-crisis highs within a few years.

After plunging by more than 20% in the 1987 New York Stock Exchange crash, the markets recovered and within a few months were back to their original levels. By 1990, they then set new highs.

After the crisis caused by the dot-com crash at the turn of the century, when the Nasdaq index, for example, lost up to 78%, a rally of more than 300% came by the end of 2003. Within a few years, the markets reached new all-time highs.

This post-crisis pattern was repeated in the most recent financial crisis in 2007-2009, when the S&P 500 index fell by up to 50%. But by 2013, the pre-crisis highs of 2007 had already been surpassed and economic growth had returned.

It can be said that historically, after periods of extreme market declines and pessimism, there is a rebound from the bottom and a turn to growth, which is often rapid and strong. Investors should thus look for opportunities after large corrections, as periods of maximum pessimism tend to be a good entry point into the market. And that goes for dividends as well.

Time is of the essence

Time plays a crucial role in investing for several reasons. First of all, the longer your money works, the more the principle of compound interest becomes apparent. Interest is paid not only on the original investment, but also on the interest previously paid, and the longer the time horizon, the more this effect adds up.

Time allows market volatility to level out over the long term and for stock market growth, which is positive over the long term, to prevail. Short-term fluctuations do not have such an effect over the long term.

As investment time increases, the influence of emotion and the need to time the market also decreases, because the longer we invest, the less it matters at the specific moment we invest or withdraw money. More important is the regularity of investing, which protects us from timing risk.

All of this implies that time is the most important factor in investing and can increase the probability of success of your investment strategy. The earlier you start investing and the longer you let your money work, the better it can generate the necessary long-term returns.

What is your favourite chart?

Disclaimer: This is in no way an investment recommendation. It is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.