Part 1: The Secret Ingredients for Retiring Early (Using the Stock Market)

by FI Fighter on December 6, 2012

in Stock Investing Thoughts

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The secret ingredients for “how to retire early” using the stock market are not locked up in a vault somewhere. At least not anymore. Today, we live in the Information Age where information is readily available, and accessible to all. Everything you need to know is a mouse-click, or finger tap away.

But here are the “secret ingredients”, anyway:

Compound Interest

Nowadays, everybody knows about the powers of compound interest. In a nutshell, you simply buy shares of quality companies, re-invest the dividends, and watch the snowball buildup over time. By the time you retire, your golden hen(s) will have laid so many eggs, you’ll never have to worry about going hungry again.

Compound Annual Growth Rate

Then, there’s the idea of compound annual growth rate. We know that the stock market is volatile, and prices jitter, moving wildly up and down on a day-to-day basis. By stepping back and focusing only on the long-term movements, we can free ourselves of the noise, and get a clear picture of the real signal. By doing this, we now see that market is resilient, and able to withstand tough economic times. In the long run, it always moves in the upward direction!

So, we can buy today, knowing almost certain that the price will increase in the future. Further, we also learn that when the market does plunge, it’s temporary, so we should not be fearful, but instead, greedy. These downturns provide the best buying opportunities of all, so load up!

Dividend Growth Investing

Lastly, dividend growth investors have spread the word and educated people on how to build a reliable income stream. Those seeking to reach financial independence (like myself), now know that it is possible to build a sustainable passive income portfolio by investing in a blend of large-cap, dividend paying (and growing) companies.

By focusing on dividends and dividend growth, we can now: ignore the fluctuating stock price (for the most part), beat inflation, receive a paycheck every quarter (or half year, or year), and count on pay raises every year.

We strive to invest in the largest, most stable, best-in-class companies. These premiere blue chips have a strong history of not only surviving tough economic downturns, but thriving in spite of them. Their history shows a rugged dividend, one that never gets cut, and only continues to grow each year. These gems make up the Core Holdings in our portfolio. But, because nothing in life is certain, outside of death and taxes, we take a Buy and Monitor stance on each one of our positions. For extra safety, we usually own a basket of stocks, ranging from 10-40+ holdings.

Just for clarity, here are some blue chips that fit the bill, and would make any dividend growth investor proud to own in their portfolio.

Dividend Holdings:
Procter and Gamble (PG)
Johnson and Johnson (JNJ)
McDonald’s (MCD)
Coca-Cola (KO)
Chevron (CVX)
Exxon Mobil (XOM)


And, that’s basically all there is to it. These are the secret ingredients for “how to retire early” using the stock market. Others might utilize something slightly different for their own recipe, but these ingredients are the ones I’m cooking with.

And just like with cultivating a garden, one size does not feed all. You’ll also need to figure out how many dividend seeds to plant to satiate your appetite. I don’t eat much, so I don’t need to plant many dividend seeds, or worry about growing over-sized dividend trees either.

The rest is just time. Lots and lots of time.

{ 22 comments… read them below or add one }

1 PaulineNo Gravatar December 6, 2012 at 5:33 am

Maybe because I don’t have that much time or patience I have never relied on the stock market much. I have a few index funds but they don’t even make 1% of my net worth.


2 FI FighterNo Gravatar December 6, 2012 at 8:14 pm


Time and patience are definitely most needed when investing in stocks 😉
Right now, time is on my side, and I’m trying to teach myself to be more patient.

Index funds are great, and a very convenient way for someone to invest with minimal effort. They also beat actively managed funds 80% of the time (according to The Boggleheads Guide to Investing)!

Best wishes.


3 PKNo Gravatar December 6, 2012 at 8:07 am

I know I’ve been harping on it (and it may not happen!), but are you at all worried about the recharacterization of dividend income to normal income? I guess that would fall under the ‘monitor’ section of buy and monitor, ha.


4 FI FighterNo Gravatar December 7, 2012 at 6:31 pm


I apologize for the lateness in reply. For some reason, your message was sent to my spam box.

In regards to any changes made to the tax laws, I’ll admit, it’s not what I would call the ideal situation. With that said, I still believe in dividend growth investing for the long haul. So, my plan is to keep on doing what I’ve been doing, which is to keep buying dividend stocks.

Best wishes!


5 Brick By Brick Investing | MarvinNo Gravatar December 6, 2012 at 9:10 am

Great post! Simple and to the point. A lot of people believe there is much more to investing in order to make money but THERE’S NOT! It is this simple! Find great businesses that pay dividends, increase dividends over time, and buy them at a discount.


6 FI FighterNo Gravatar December 6, 2012 at 8:15 pm


Thanks! I tried to keep it simple to highlight how simple it really is. Now, consistency, that’s the hard part!

Take care!


7 BrianNo Gravatar December 6, 2012 at 9:11 am

I learned from my dad and my grandpa the powers of dividend growth investing. My dad has been keeping me up on his financials (in case something happens and I have to step in) and it jsut makes my jaw drop at he makes more from dividends than my wife and I make from our combined salaries. It is truely inspiring and motivates me to try to top him!


8 FI FighterNo Gravatar December 6, 2012 at 8:18 pm


Wow, that’s an amazing example of the the powers of compounding. With enough time, anything is possible!

You definitely have some great role models to learn from. The proof is in the pudding. Best of luck on your journey!

Take care!


9 Accumulating AssetsNo Gravatar December 6, 2012 at 10:05 am

Good post and I could not help but notice that there are some “ingredients” to wealth in your picture!

Crisco= SJM (15 years of increasing dividends)
Kirkland= COST (9 years of increasing dividends)
The salt and pepper= MKC (27 years of increasing dividends)



10 FI FighterNo Gravatar December 6, 2012 at 8:20 pm


Haha, good eye! That was actually unintentional, so it’s purely coincidental. Luckily, I picked some solid dividend companies, instead of mistakenly including a Kodak camera, or Blackberry 😉


11 John S @ Frugal RulesNo Gravatar December 6, 2012 at 10:20 am

Nice post! I know dividend investing is not sexy by any means, but if done right can work very well. I currently hold KO myself, I just bought it post split. I used to hold MCD, but sold it very near its high, I am waiting to get into it again as it’s going down.


12 FI FighterNo Gravatar December 6, 2012 at 8:22 pm


Thanks! Yes, dividend investing is the slow and steady approach. Nothing glamorous here, expect for the end results! KO is one of my favorites as well, and I am still waiting for a good opportunity to load up.

The timing aspect is another important topic, which I’ll address in Part 2.

Best wishes!


13 Dividend MonkNo Gravatar December 6, 2012 at 2:35 pm

Investing seems to be something that’s simple but not easy. A lot of people get tempted into doing things like selling their equities at market bottoms because they don’t know how to determine a fair value of their holdings to begin with.

So yeah, I think for the majority of people there are two major investing styles that work best:
a) Holding an indexed portfolio and rebalancing it.
b) Invest in dividend growth stocks for the long term. Buy and monitor.
c) Some combination of the above (like indexes for 401k, and dividend growth stocks for another portfolio.)


14 FI FighterNo Gravatar December 6, 2012 at 8:28 pm

Dividend Monk,

You’re absolutely right, valuation is a very important concept. I’ll go over this in part 2. The good news is that there are many useful tools out there that an investor can use to help guide them. So, investing in dividend growth stocks should not be difficult in this day and age. I can’t even begin to imagine how people used to invest back in the days before internet. You must have really been buying with conviction!

Those two investing styles are both solid. You can go with one, or the other, or combine both. I’ve tried A exclusively. And I’m executing B exclusively in my taxable portfolio. In total, I am going with C.

Whether you go with: A, B, or C, it’s better than D) None of the above 😉



15 Jon @ MoneySmartGuidesNo Gravatar December 6, 2012 at 6:27 pm

Great post….when it comes to investing, time is your best friend!


16 FI FighterNo Gravatar December 6, 2012 at 8:31 pm


Amen to that! Forget work hard, play hard. I’m going with work really hard now, and play all day later!

Take care!


17 LeighNo Gravatar December 6, 2012 at 9:57 pm

AFAIK, RIMM doesn’t pay dividends 😉 I would be quite surprised if it did, haha!

I actually think the most important ingredient is your savings rate and compound interest aka starting early. By starting to max out one’s 401(k) at age 22, there should be enough money in it by age 28 or 30 at the latest to cover all living expenses once you hit 59.5. But if you start later? It’ll take many more years to have enough.

Another secret ingredient: ignore the news!

(I apologize if I am spoiling the next few parts in the series 😀 I hope you’re feeling better!)


18 FI FighterNo Gravatar December 8, 2012 at 7:11 pm


Thanks! I’m feeling much better now, since I got to take a few days off from work.

Yes, you’re right, RIMM doesn’t pay dividends, which is why it definitely doesn’t belong in the picture 😉

Starting early is probably the best decision you can make in your investing career. Like you said, compounding needs time to work, so the sooner you start, the sooner you can reap the rewards.

Ignoring the news is a good idea. In this article, it’s sort of lumped into the compound annual growth rate section. The purpose of the CAGR here is to show that the market does bounce up and down (usually due to bad news). But in the big picture, the CAGR goes up, so we can buy with confidence. Of course, we also need to know when to buy (market timing), which I’m planning on addressing in part 2.

Take care!


19 JC @ PassiveIncomePursuitNo Gravatar December 7, 2012 at 2:25 pm

Unfortunately with it being as simple as this the majority of people are still clueless about it and have no idea. I know when I was in high school the only thing that resembled a personal finance topic was in my econ class we had a project about a food budget or comparing prices for food across stores or something along those lines. Luckily I’ve never really been one to just go on spending sprees, except for when I happen to have free capital in my brokerage account.


20 FI FighterNo Gravatar December 8, 2012 at 7:14 pm


Yeah, same here. My econ class in high school was basically my only exposure to the topic of investing. I didn’t learn anything about investing in college. This has been suggested repeatedly by others, but it really is about time that everyone be required to take a basic money management course.

I hear you on the shopping sprees! I haven’t been buying as of late, but can’t wait until the market is on sale again!

Best wishes!


21 Dividend Growth Stock InvestingNo Gravatar December 10, 2012 at 6:12 pm

The stock market is a great tool for building wealth. Dividend growth investing is my strategy of choice as I believe it offers a great opportunity for those looking to build a passive income stream to replace an income from a job. I think using the stock market as a tool to help you retire early is a very good idea.


22 FI FighterNo Gravatar December 15, 2012 at 11:25 pm


Just like you, I am relying on the stock market and dividend investing to build up my passive income stream.

May it take us both to the promise land! 😉



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