It's no secret that one of the best ways to earn a return on your investment in the stock market is to buy stocks with high dividends. An important mindset shift needs to occur in order to understand this power.

A typical investor might be more like a gambler, who buys something in the hope that the price goes up very quickly. The savvier investor looks at a stock as a cash flow generator, one that hopefully increases its cash payments over time even if that means sacrificing big short term gains.

The reason that the savvy investor's strategy works so well is because of the way that compounding interest works.

The idea behind compounding interest is that when you make some money from an investment, you put that money back into your investment. Now the reinvested money will also make a return. If you reinvest this new money, your original investment is even bigger than the first two instances.

From there, the amount of new return generated from reinvestments accelerates immensely. What ends up happening is that the money grows exponentially instead of in a straight line.

The key is making a return and then reinvesting the money.

Now the problem with buying a stock without a dividend is that you can't make a return without selling the stock. Then you have to find a new stock, and one that also goes up. If you continue a cycle like this, you have to be on the right side of the trade much more often.

Compare that to an investor who buys a dividend paying stock. Each yearly dividend is an immediate return in the shareholder's pocket that he can use to buy more shares. Those new shares will also earn a dividend, and the cycle of compounding interest starts.

You can see that the non-dividend paying stock can at best grow in a straight line. That line could go up very quickly, but you'd have to time the sell point AND find a new and better investment. Whereas the dividend investor sees his money grow exponentially whether the stock moves up or down.