Assuming you're not just extremely lucky, being a truly successful investor generally means that you must either possess great vision or be exceptionally vigilant. I believe, though, that vigilance is better.

Don't get me wrong. It's a phenomenal thing if you are a great visionary, and you should certainly take advantage of it. Visionaries see the future with uncanny clarity. They know which innovations are the next big things and which companies will benefit from them. They understand global change in the marketplace and adjust their strategy accordingly. And they spot a declining business model well before the market does.

But the trouble is, being a consistent visionary is extremely difficult. And frankly -- with the possible exception of Nostradamus or, perhaps, Leonardo da Vinci -- that's why I don't believe they exist.

Oracular schmacular
How many people could have predicted 10 years ago that Electronic Data Systems (NYSE:EDS) or Eastman Kodak (NYSE:EK) would slash their dividends? Almost no one. Who could have imagined that the formerly staid utility sector would turn into a virtual high-risk Wild West show during the late 1990s, ultimately leading to numerous industry stalwarts such as TXU (NYSE:TXU) and Duke Energy (NYSE:DUK) losing more than half of their value? Not me.

No, in fact, what most folks mistake as visionary simply involves plain old hard analytical work. And that leads us to the vigilant investors -- a group that includes just about everyone else who successfully participates in the financial markets.

Thankfully, all it takes to join the club are time and a little elbow grease. After all, the vigilant investor simply evaluates. She wakes up in the morning, looks over her portfolio, and asks, "Does the reward justify the risk today?" Then she does it all over again the next day and the next.

The fact is that not even our blue-chip investments are as static as we like to think. Bad things happen to good companies every day -- Merck (NYSE:MRK), anyone? -- and sometimes those bad things hit your company so hard that it doesn't get up for a while -- or ever again.

Stay focused
But what determines success or failure on those bad days is vigilance. I recommended Merck in the pages of my dividend-oriented newsletter, Motley Fool Income Investor, just months before the Vioxx disaster was announced. Thankfully, readers have forgiven the indiscretion because the company is now one of just five losers out of my 50 total recommendations, and overall we're still crushing the market. But clearly I cringe when I see how Merck's stock has performed since its recommendation.

That said, what I'm proud of is our vigilance in studying the company. When the Vioxx news hit, we deconstructed the company and rebuilt it from the ground up, weighing all the pros and cons one by one. Over the course of the subsequent days, weeks, and months, I determined that, though the stock was likely to remain volatile, the market had overreacted to the news that Vioxx (then Merck's second-best-selling drug) had been pulled from the market.

I also concluded that its dividend remained sustainable and that the stock was undervalued at its current price. That decision allowed our readers an informed opportunity to purchase the stock below $27 per share and lock in a 5.5% dividend yield, which will hopefully go a long way toward negating any losses they might have suffered on their original purchase.

Thus, the mantra of the vigilant investor is "buy to hold," not buy and hold. When things change -- and they most certainly will -- vigilance provides the edge you need to build long-term wealth. And you won't even need to polish your oracular skills or your crystal ball to take advantage of it.

Know what's achievable
Another aspect of visionary investing often leads people to take on far more risk than is necessary to achieve superior returns. Invariably, folks believe that they must find the "next big thing" in order to generate big gains. Thus, they seek "visionary" companies that speculate on the future. Moreover, these folks have convinced themselves that these are the types of companies that have performed best over the years, when this is simply not true.

For example, after reading one of my dividend-oriented articles, a reader sent me an email explaining that he had purchased shares of Apple Computer (NASDAQ:AAPL) in 1984 and that he was now sitting on a "small fortune." I had disclosed in that article that I owned shares of PepsiCo (NYSE:PEP), and this reader went on to say that I could stuff my boring dividends, my 3% yields, and my shares of PepsiCo for all he cared, because he would take his Apple shares over my strategy any day of the week.


While I have nothing against Apple as a company, it's this sort of misconception about returns that has so many investors taking unnecessary risk. The fact is that the soda business carries far less business risk than the computer, software, or gadget businesses, but you don't have to sacrifice return to enjoy the lower-risk approach.

To prove that point, let's take a look at the actual performance of these two stocks since 1984: If you had purchased $1,000 worth of each company at that time, you'd have started with about 38 shares of Apple and 24 shares of PepsiCo. Over the past 21 years, however, those shares would have split into 302 shares in Apple's case and 425 shares in the case of PepsiCo (no pun intended).

Thus, today this Apple investor would be sitting on a "small fortune" worth about $13,920 for each $1,000 invested. The PepsiCo buyer? Try $23,200. The race isn't even close. It slices, it dices -- but, wait, there's more!

Consider that this return doesn't assume dividend reinvestment. If our PepsiCo owner had chosen to reinvest his dividends during that time instead of spending them on Cracker Jacks, he'd be sitting on more than 660 shares worth over $35,550. I will indeed keep my dividends and my shares of PepsiCo, thank you very much.

Granted, this is a single arbitrary example, but the proof is in the pudding, as they say. Professor Jeremy Siegel's new book, The Future for Investors, includes vast amounts of market data to support the fact that stodgy, boring dividend-paying stocks outperform so-called "growth" stocks over the long term when you account for the power of reinvested dividends. Why? Because investors inevitably pay too much for growth and pass on the values that truly hold the key to superior returns: compounding payouts.

Mathew Emmert likes to eat apples, but he doesn't own the company. He does, however, proudly own shares of PepsiCo. He's also the chief analyst of Motley Fool Income Investor , where he's beating the market while taking half the risk. The Fool has a disclosure policy.