Here’s a simple question: Do you invest in stocks or in companies?

Stock-focused investors assess financial statements, technical charts and other gauges to help them know a good value when they see one. Investors in companies prefer to focus on the business itself, while fundamental and technical considerations play a secondary role.

#-ad_banner-#This “buy a great company at any price” approach may seem foolish, but it’s actually quite wise.

Let me explain.

Great companies will deliver solid returns year after year. You may not find such a company before the crowd, but you can still reap ample gains after the train has left the station.

To illustrate my point, let’s talk about Magellan Midstream Partners, L.P. (NYSE: MMP).

A decade ago, this nationwide oil and gas pipeline operator was added to my colleague Nathan Slaughter’s High-Yield Investing portfolio when shares traded for around $10. At the time, the company paid a $1 annual dividend, good for an impressive 10% yield.

If you were a subscriber to Nathan’s newsletter at the start of 2011, you would likely have noted that shares had increased into the low $20s and the dividend exceeded $1.40 a share. Too late to hop on this former bargain stock? On the surface, it would seem so.

Yet here’s what happened over the next few years.
 

You’ll notice that this has never been a swing-for-the-fences kind of stock, the kind that can double or triple your money in one year. To extend the baseball analogy, this is a stock that plays station-to-station ball. And as we’ve seen in baseball, a hitter that can routinely get on base can do a lot more good than the home run hitter that also strikes out too many times.

Simply put, Magellan Midstream Partners is a scoring machine. Since it joined the High-Yield Investing portfolio back in 2005, the consistent returns this stock produced year after year have compounded into a whopping 456% gain.

The key takeaway: this stock has never been inexpensive when viewed in the context of prior financial results, but the company has always been a great growth platform. Like the stock, love the company.

The world’s top fund managers always seek out companies like this… ones that can deliver impressive long-term compounded gains. Even Albert Einstein, not known for his investing acumen, once quipped that “compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”

Compound interest, you say? While MMP’s share price has certainly compounded into impressive gains over time, there’s another factor you need to consider. When a company like MMP posts impressive and rising dividend payments year after year, it can also lead to impressive dividend yields.

I’m talking about a concept called yield-on-cost. It’s a brilliant concept, and the easiest way I know to build a portfolio that can generate robust income streams.

Let’s again use Magellan Midstream Partners to lay out this notion. Recall that back in 2005, you would have gotten roughly $1 a share in annual income on a $10 stock. And since then, the dividend has steadily risen to $2.87 per share today. Well, using that $10 cost basis, investors that held onto shares in the ensuing decade are now getting a 29% dividend yield today.

It’s worth noting that Magellan always hikes its annual dividend, so if you were to buy today, the “yield-on-cost” in a few years could exceed 30%. That payout is likely to remain in perpetuity, considering MMP’s rain-or-shine business model.

As you build your portfolio, you shouldn’t be looking for appealing stocks, but instead for appealing companies. Tried-and-true performers like Magellan, bought today, are likely to deliver solid gains in the years ahead as well. That’s the power of compounding and yield-on-cost working on auto-pilot for your portfolio.

P.S. If you’re still skeptical about the power of compounding (or maybe you would simply like to learn more), then I urge you to read Nathan Slaughter’s latest research on the topic. He details how 156 years of data prove that compounding dividends beat all other investment approaches hands down. To access the best strategy for building long-term wealth (and get a few of Nathan’s top stock picks), follow this link.