“I’d just like to make some money for once in the stock market. I’m retired, so I have to be a little careful.”

Dear DTA,

I would just like to make some money for once in the stock market. I am retired, so I have to be a little
careful. That’s hard to do, even with great recommendations. Thank you for trying to help.

-Marvin B.

Hi, Marvin. Thank you for writing to us. We’re here to provide valuable information and inspiration to the readership, which is what brought us to start this series whereby we respond directly to readers like yourself.

Your question implies that you haven’t ever made money in stocks, which is a shame.

The stock market is, historically, one of the best possible places you could have put your money over the long term.

Stocks perform better than any other asset class I know of over long periods of time.

However, there are cycles in the markets – peaks and troughs that can shake people out, causing emotions to overwhelm people.

When this happens, people tend to lose money.

But if you can stick with high-quality stocks for the long haul, you’re pretty likely to do very well.

I’m a great firsthand example of the power of the stock market.

For perspective, I was worth a negative amount of money as recently as early 2010. I was 27 years old at that time. And I wasn’t broke… I was below broke.

But I turned it around by living below my means, working harder, earning more, saving as much money as possible, and buying high-quality dividend growth stocks at appealing valuations.

I then just sat on those investments.

The result?

I went from below broke at 27 to financially free at 33.

This occurred once my real-life, real-money six-figure dividend growth stock portfolio was generating the five-figure passive dividend income necessary to cover core personal expenses like rent, food, and transportation.

Now, this happened in about six years. So you can see that it doesn’t take long for high-quality stocks to really do some magic.

However, even more time further empowers compounding.

I’ll show you how this works.

The broader market has compounded at a ~9% (nominal) annual rate over the last 100 or so years.

Let’s say you can put away just $100 per month at that rate of return. After 20 years, you’re looking at just over $67,000 (ignoring taxes and inflation for the sake of brevity).

So a little capital and plenty of time can do wonders.

However, an even higher rate of return can further bolster that end result.

And that’s just one more reason to take a good look at dividend growth investing.

This investment strategy basically involves buying high-quality dividend growth stocks at good valuations and then holding for the long term, reinvesting the growing dividend income until such time it’s needed to pay bills.

This strategy allows one to “have their cake and eat it, too”.

The cake is the wealth.

Dividend payers and growers have been shown to outperform the broader market over longer periods of time (per Ned Davis Research), which means that earlier 9% number could potentially be boosted, which would naturally increase the amount of wealth you ultimately end up with.

Eating the cake is the income.

Because dividend growth stocks are paying growing dividends (get it?), one can count on a fantastic source of passive income that’s organically growing all by itself, generally faster than the rate of inflation.

How can companies afford to pay out growing dividends for years on end?

Well, it’s quite simple: they’re usually selling products and/or services that are ubiquitous and in demand from society. Moreover, they’re able to sell more products and/or services over time, while simultaneously charging more.

This means more profit, which in turn means more dividends.

A great example of how this works is Colgate-Palmolive Company (CL).

Colgate-Palmolive sells toothpaste and soaps (and other products) to people all over the world. As they’ve expanded their sales across the world, and as the world has increased in population, the company has been able to sell more products. Meanwhile, the prices of these products have risen in time, as people trust Colgate toothpaste and Palmolive soap and pay a premium for the quality.

That all leads to more profit, which funds those growing dividends.

Indeed, Colgate-Palmolive has increased its dividend for 54 consecutive years.

And there’s no indication that behavior will cease anytime soon.

In addition, many high-quality dividend growth stocks are fairly safe investments.

Now, that doesn’t mean you won’t experience price swings (volatility). Even great businesses can see their stock take a big tumble if the stock market suffers some kind of shock event. But the beta (a measure of volatility) on many of these dividend growth stocks is quite low, indicating low overall volatility.

Furthermore, these are fairy conservative investments by their very nature – investing in Colgate-Palmolive, for example, is investing in toothpaste and soap.

That’s not exactly a big stretch. I mean, we’re not talking about some tech startup here.

In order to invest, though, you really need to have a base of knowledge built beforehand.

Knowledge is power.

And so it would definitely be worth your time to read through fellow contributor Dave Van Knapp’s dividend growth investing lessons.

It’s a series of articles that walks you through the dividend growth investing strategy… from A to Z.

And a treasure trove of ideas exists within David Fish’s Dividend Champions, Contenders, and Challengers list, which is an invaluable compilation of more than 800 US-listed stocks with at least five consecutive years of dividend increases.

Once you’re finally ready to put capital to work, I publish an article every Sunday naming an undervalued dividend growth stock of the week.

In order to qualify for that series, a stock has to pass a number of tests: the stock has to be featured on Mr. Fish’s list, it has to be high quality (great fundamentals), and it has to look undervalued (after a stringent valuation process that incorporates professional analysis).

This series is designed to provide readers like yourself appealing long-term investment ideas that are valuable and actionable.

So you have some of the tools necessary to finally make some money in the stock market.

But it’s up to you, Marvin, to take action.

And if you want compounding to really work in your favor, it’s important to start as soon as possible.

I wish you luck and success.

Jason Fieber


Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.