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

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)

Summary

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.

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FI FighterPart 2: The Secret Recipe for Retiring Early (Using the Stock Market)Dividend Growth Stock InvestingWeekend Wealth (Dec 8 - 9) | Brick By Brick InvestingWeekend Reading Picks and Shout Outs | Well Kept Wallet Recent comment authors
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Pauline
Guest

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.

PK
Guest

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.

Brick By Brick Investing | Marvin
Guest

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.

Brian
Guest
Brian

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!

Accumulating Assets
Guest

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)

🙂

John S @ Frugal Rules
Guest

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.

Dividend Monk
Guest

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.)

Jon @ MoneySmartGuides
Guest

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

Leigh
Guest

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!)

JC @ PassiveIncomePursuit
Guest

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.

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Dividend Growth Stock Investing
Guest

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.

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[…] Part 1: The Secret Ingredients for Retiring, I spilled the beans and let out a “secret” that a billion people probably already […]

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