The market has fallen by 40% from its highs a year ago, but that doesn't mean you'll never again make money investing.

If anything, the Wall Street Panic of 2008 means you have an even better chance of seeing some extraordinary long-term returns.

Winners through the crashes
In the past 25 years, there have been at least three major market corrections:

  • Black Monday in 1987.
  • The bursting of the dot-com bubble from 2000 to 2002.
  • The bursting of the subprime and credit bubbles in 2008.

In each one, investors racked up significant paper losses (and realized them, if they sold low) as the market crashed. Yet investors also racked up significant gains coming out of each of the market corrections. Why? Three reasons.

  • Cheaper stock prices mean you can buy more shares of good companies for every dollar you spend. Since stock prices are based on the market's perception of a company's future performance, the overall pessimism works in your favor.
  • Because share prices are low, reinvesting dividends (which don't fluctuate with share price) boosts your investment even further, because each reinvested dividend buys more shares.
  • When market sentiment returns to a more even keel, bringing share prices up with it, you'll see the best returns from the shares you bought at the lowest prices.

In other words, the more the overall market has been hammered, the better your chances of profiting as it recovers.

Let's revisit door No. 2
That market crashes are good times to buy in isn't news -- we've all heard the adage "buy low and sell high." But the part dividends play in this story isn't as well-known.

Because dividends are based on a company's actual results and its management's projections for its operational future, a maintained -- or even raised -- dividend signals that the underlying company is healthy -- no matter what its stock price does. That's a nice reassurance during a period as volatile as this one.

But dividends can do more than signal companies worth buying -- reinvested, they also juice your long-term returns. In fact, historically, reinvested dividends have represented more than 40% of the market's long-term returns -- and when the market has slashed prices the way it has lately, reinvested dividends can do even more. Take a look at the difference they'd have made to investors in these companies.



25-Year Growth of $1,000, Excluding Dividends

25-Year Growth of $1,000, Dividends Reinvested

Dividend Difference

PPG Industries (NYSE:PPG)





Emerson Electric (NYSE:EMR)










General Electric (NYSE:GE)





Coca-Cola (NYSE:KO)





Air Products & Chemicals (NYSE:APD)





Automatic Data Processing (NYSE:ADP)





Strong and sustainable dividends can take already good returns and make them spectacular.

More powerful than before
When share prices are down, as they are now, those dividends matter even more. As huge as the dividend difference is in the examples above, it'll be even bigger coming out of a market downturn. Over the long haul, there's nothing like dividend reinvestment to help your nest egg recover and resume its growth.

At Motley Fool Income Investor, we're taking full advantage of this market downturn to pick up some of the strongest dividend-paying companies around at dirt cheap prices. We've used the power of those payouts to stay ahead of the market as it has fallen, and we're planning to keep using those dividends to compound our growth more quickly during the recovery. To see our most recent selections, click here to start your free 30-day trial -- there's no obligation to subscribe.

At the time of publication, Fool contributor Chuck Saletta owned shares of General Electric. PPG Industries is a Motley Fool Income Investor selection. 3M and Coca-Cola are Inside Value recommendations. The Fool's disclosure policy is looking forward to a recovery.