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Make Money From The Stock Market For Early Retirement

Updated on May 23, 2012

Won't it be great to be able to make money from the stock market so that you can retire early? You can spend more time with your grand kids, or cruise round the world, or do all those things that you said you would do.....someday.

But you also know that investing in the stock market is not for the faint of heart. While there is money to be made, you have neither the knowledge, skills nor the fortitude to take the ups and downs of the market. Furthermore, you know that it is risky and you have no intention of gambling your money away.

But what if I were to tell you that there is a way to make good money on the stock market with relatively low risk? You will need to learn a little bit about the market, but only the very basics. The disadvantage of this technique is that you need to have a longer term time horizon, at least 5 to 10 years.

The Technique
This technique is actually no big secret but is often overlooked in favor of other riskier techniques that can earn more money, and generate more broker commissions. Very simply, this technique involves buying shares of companies that pays high dividends. That's it.

However, as you may guess, just buying the shares is not without its risks or everybody will be doing it. But, if you apply a few simple rules, this investment technique can give you pretty good money with relatively low risk.

The Rules

  1. Set aside a small amount each month for buying shares. It is okay if you can't do it every month but make sure you spread out your buying and not do it all at one go.
  2. Obtain a listing of the shares traded on your local stock exchange along with their relevant data. Make sure the PE ratio and dividend yield is included in the data.
  3. From the listing, shortlist the shares with a high dividend yield. I would normally only be interested in shares with a dividend yield of 5% and above.
  4. From your list, remove the shares that does not have a PE ratio listed, that is, they are losing money. From the remaining list, also remove the shares with a high PE ratio. For me, a PE ratio of higher than 20 is too high. I usually go for shares with a PE ratio of 10 or below.
  5. At this point, aim to have 5 to 20 shares left in your list. You now need to check the individual companies for their history of dividend payments. Make sure they have a consistent history of dividend payments going back at least 3 to 5 years. If you like, you can even read their annual report to see if there is any mention of the company's dividend payment policy.
  6. Additional factors that you want to consider in your selection of shares are the liquidity of the shares and the market sector the company is involved in.
  7. You now have a list of shares you want to invest in. Buy one company's shares every month, and make sure it is a different company each time.
  8. It is recommended that you redo steps 2 - 6 at least once every 6 months although once a month would be ideal.
  9. Once a year, look through your records for shares that have stopped giving out dividends. Also look out for shares whose dividend yield has gotten too low, or whose PE ratio has risen too high. My advice would be to sell off those shares.

Risks And Rewards
There is no such thing as a risk free investment, whether in the stock market or elsewhere. In fact, even putting your money in the bank has risks, as the financial crisis that started in 2008 has shown.

The technique outlined, while not totally risk free, offers the following advantages:

  • You get paid at least once a year from each share that you own.
  • As you only buy shares of companies that are making money, there is a good chance that the shares will rise in price.
  • You practically do not need much investment knowledge to implement this technique.
  • Only a very small amount of time is needed to monitor your investment.

There are some small disadvantages to this technique:

  • Since you do not attempt to time the market, your shares might drop in price over the short term.
  • This is a "buy and forget" type of investment, so your time horizon should be from the medium to the long term. We are talking at least 5 to 10 years, although preferably you should just hold them until retirement and beyond.

The longer the time you have for implementing this technique, the more effective this technique becomes. Over time, as your dividend income increases, do try to reinvest at least a part of the income.

If you are a first time investor, I would understand if the above seems overwhelming. I would highly suggest that you consult a friend knowledgeable in stocks for their opinion on the above technique and how you can go about obtaining the data you need, and implementing the technique.

Dividend - Dividends are payments by a company to its shareholders. The payments can be made on a yearly, half-yearly or quarterly basis, but there is no hard and fast rules and it really depends on the company. Note that dividends are normally paid out from the profits of a company, but a company has no obligation to declare a dividend even if it is profitable.

Dividend Yield - This is the amount a company pays in dividends each year with respect to its share price. It is usually expressed as a percentage. It is calculated by taking the dividends received divided by the present amount you need to pay for the shares, and multiplying the result by 100.

Liquidity - When applied to shares trading on a stock exchange, it is a measure of how easy it is to trade in the share, that is, whether there are ready buyers and sellers for the share at a fair price. If the liquidity is good, then you should be able to buy or sell that share readily and at a fair price. But if the liquidity is bad, then you might not be able to trade the share easily, and even when there are buyers or sellers, the price bid or offered will probably be at a large premium or discount to the market price.

PE Ratio - This is a number that tells you how much money the company is making compared to its share price. The smaller this number is, the better the company is doing. Typical values of PE ratio would range from 5 to 20, but this also depends a lot on the company's sector and the economic climate.


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    • wandererh profile image

      David Lim 6 years ago from Singapore

      Desperator - 300,000 shares of SPH would cost about $1 million and based on this year's dividend, you will get $230 per lot which comes to $69,000 or $5750 per month. Definitely enough to live on and retire early. I think the tricky part is getting enough money to buy the shares. :(

    • profile image

      Desperator 6 years ago

      Yes, it a good strategy. I practises this method since this year. Holding for long-term 15,000 shares of Capitaland & SPH. I will invest further in SPH when money is available. I beleive one's can lives on passive income based on 300,000 shares. A comfortable margin to beat declined yield return. And not required to work as "modern slave".

    • wandererh profile image

      David Lim 7 years ago from Singapore

      angie - It's great that you realize the power of such techniques. 5% - 10% a year can really add up as the years go by, compared to techniques that promise 100% or more a year but comes with high risk.

    • profile image

      angie 7 years ago

      What great info! I was looking for something exactly like this.I was able to understand it and it informed me of exactly what i needed to know. Because I knew what i was looking for but not being really familiar with investing and how it all works,I just was not sure how to ask, and what to say. So I say thanks a million,because you were able to tell me all I needed to know in a page or so. Keep up the great work, and again,thank you.

    • wandererh profile image

      David Lim 8 years ago from Singapore

      You are right, inspirsation. I don't want to go into the maths here, but if you have built up a portfolio of 10 or more stocks with dividend yields of 5% or more, there is a good chance that if you were to drop one stock, any losses suffered would be more than covered by the dividends received from the other stocks.

      I would look at it as money that is not working for me. I would rather sell the stock and use the money to buy another stock that will pay dividends than just do nothing.

      Remember that the technique outlined is just a guideline. As you get more knowledgeable in the market, I'm sure you will be able to tailor the technique to your own needs.

    • inspirsation profile image

      inspirsation 8 years ago

      Thanks for the info. I've a nob question though. Suppose in Step 9, you've decided a stock is no longer viable. But the figures are in the reds (i.e. the current value is lower than what you've invested in), if you drop the stock, wouldn't you be suffering a certain loss that may or may not offset the dividends you may have been receiving?

    • wandererh profile image

      David Lim 8 years ago from Singapore

      Thanks kailask.

      As Americans would say it, this technique is really a no-brainer. Unfortunately, it is not widely recommended by financial advisors or investment bankers as it probably is not in their best interest - they want you to trade. :(

    • wandererh profile image

      David Lim 8 years ago from Singapore

      Well said, Jjustice, The beauty of the technique outlined in this hub is that you practically need no investment knowledge, and you have a very good chance of coming out ahead in the long term.

      Dogs of the Dow? Haven't heard of that. Would check it out when I have a little time. :)

    • profile image

      kailask 8 years ago

      I agree with you - you need to get into this market since it can be most rewarding once you start in a systematic and calculated manner. Weigh our options. Thanks for this article.This is like insurance - there is logic here.

    • Jjustice profile image

      Jjustice 8 years ago

      One of these portfolios that has been consistenly used and has a great track record is called the "Dogs of the Dow".

      True, options and futures are able to produce much faster returns but are not for the average investor. Traders like and need the volitility of those markets, however the person saving for retirement should stick to dollar cost averaging, diversification, knowing their own risk profile, and leaving emotion out of the investment decision making process. Nice hub!

    • wandererh profile image

      David Lim 8 years ago from Singapore

      Of course you can get a 7% return on your investment in just 24 hours trading forex.

      But can you do it consistently? And what are the chances that you will lose a significantly portion of your investment on any one trade?

    • ForexCashBack profile image

      ForexCashBack 8 years ago from Corvallis, Oregon

      I would never trade stocks. It requires a large amount of capital to make any amount of money in a short time (1-2 years). The average yearly return on a well diversified stock portfolio is around 7%. I can get a 7% return in just 24 hrs trading on the forex.

    • wandererh profile image

      David Lim 8 years ago from Singapore

      In my opinion, this is one of the easiest and most riskfree ways to invest. Even if the stock price goes down, you still get your dividends each year. :)

    • quicksand profile image

      quicksand 8 years ago

      I have always wanted to explore this trade and your article has given me the impetus to do so. Thanks. :)