4 Time-Tested, Proven Ways To Actually Beat The Stock Market

Nathan Slaughter's picture

Friday, June 9, 2017 - 12:00am

by Nathan Slaughter

Investment analysts, advisors and fund managers spend their entire working lives and billions of dollars on research vowing to "beat the market" (i.e. pick investments that outperform the S&P 500 index) in any given year. 

And yet, most of them fail. Just look at the track record among mutual fund managers. Only 12% of large-cap mutual funds have outperformed the S&P 500's performance over the past five years according to Standard & Poor's.

So if the so-called experts can't find winning investments, can we? Yes! While the odds may seem daunting, there are some time-tested, researched-backed investing techniques that have actually been proven to generate consistent returns or even outperform the broader stock market. Here are a few: 

1. Dividend-Paying Stocks Have Outperformed Since 1972
A more than four-decade-long study from Ned Davis Research (see pages 6 and 7) finds that dividend-paying stocks tend to beat the market over the long term and yield far better returns for investors than stocks that don't pay dividends.

Ned Davis' study showed that stocks in the S&P 500 that didn't pay dividends gave investors a measly 2.5% annual return from 1972 through 2015, which would turn a $100 investment into $291. By comparison, dividend-paying stocks in the S&P 500 returned 9% annually over the same period -- besting the broader S&P 500 index's 7.4% annual return. A 9% annual return over that stretch is enough to turn a $100 investment into a staggering $4,385.


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2. Stocks That Buy Back Their Own Shares Also Beat The Market
Investing in companies that regularly repurchase their own shares (performing share buybacks) is another strategy that's been proven to generate higher returns than the overall stock market. When a company buys up its own stock, fewer outstanding shares remain and the value of the remaining shares goes up -- even if the company doesn't earn another dime. That makes it much easier for these stocks to rack up impressive gains in a short amount of time.

For proof, look at the PowerShares Buyback Achievers (NYSE: PKW). This ETF invests in companies that have bought back at least 5% of their shares during the prior 12 months.
Not surprisingly, this fund has trounced the S&P 500's performance over the past several years. A $10,000 investment in PKW made in March 2007 would have turned into $23,227 in 10 years (for a 132% total return), while the same investment in the S&P 500 would have turned into just $20,627 (for a 106% total return).
 
3. Buy-And-Hold Investing Beats Trying To Time The Market
It's not the most sophisticated strategy to buy a stock and hold onto it for years or even decades, but research shows it's one of the best ways to make money over the long run. An Oppenheimer study found the S&P 500 has never suffered a loss over any 20-year period going all the way back to 1950, suggesting that investing for the long-haul can be a low risk strategy. On the flipside, Oppenheimer's study showed the risks of short-term investing, as the S&P 500 has lost money a whopping 16 times in a one-year period since 1950.

Further backing that sentiment, research from Morningstar (highlighted in a Fidelity report) found that investors who didn't have their money invested in the stock market for the 30 biggest rally days from January 1980 through May 2016 would have made only one-fifth as much money as long-term investors that kept their money in the market the entire time.

4. Dividend Reinvestment And Compounding Helps Create Lasting Wealth
Dividend reinvestment is the engine of compound growth. When you reinvest your dividends to purchase more shares, those new shares generate even more dividends. More dividends buy even more shares. Simply put, if you're not using compounding, then it's going to be hard for you to earn lasting wealth, and you'll be dependent on timing and playing the market as if it were a lottery -- a loser's game.

I've talked about how powerful dividend reinvestment and compounding can be before. If you were to invest $500 every month (or $6,000 each year) into dividend-paying stocks that returned 6% annually and reinvested your dividends, your nest egg would be worth almost $90,000 in just 10 years, then $240,000 in 20 years, and nearly $509,000 in 30 years. 

After 34 years, you'd be earning $40,000 every year in capital gains and dividends in this hypothetical example -- not a bad return for putting in just $6,000 each year. 

The Takeaway
While no strategy or investment can guarantee market-beating returns, these time-tested and proven principles offer a great starting point for your own investing success. 

The key behind these lessons: If you want to reduce your loss risk and maximize your returns, look for cash-rich stocks that pay dividends and regularly repurchase their own shares, keep your money invested for several years or even decades, and keep reinvesting your dividends. If history is any guide, your hard work and patience may pay off handsomely in the long run.

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Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.