Dear DTA,

My goal is to supplement my income with stock trading. I’m not looking to get rich, but I’d like to maybe double my annual salary with trading. Then I’d like to diversify into stocks/funds that I can hold for a much longer period of time, along with some income-generating real estate.

-Chuck P.

Hi, Chuck. Appreciate you taking the time to write to us. And we try to show our appreciation by responding directly to readers’ questions just like yours.

So the first thing I’ll note is that it’s incredibly difficult to routinely register large profit from stock trading alone.

When you read or hear about people who have really been successful in the stock market over a longer period of time, do you often see that they’re traders or investors?

I think you’ll find – if you really look into it – that they’re most often the latter.

I’ll throw some names at you.

Warren Buffett. Peter Lynch. Benjamin Graham. John Bogle. John Templeton.

All long-term investors who have made massive fortunes.

I would challenge you to come up with a list of similarly successful people who have made fortunes via short-term stock trading.

The thing is, the stock market is this incredible money-making machine.

That’s because of the power of compounding.

Compounding essentially works 24/7 – no holidays or weekends off.

But it needs time to do its thing.

Trying to jump in and out of compounding is like not showing up to work for large chunks of time but still expecting to get paid for those times.

Warren Buffett put it perhaps a little more eloquently than me: “…to dance in or out of something that’s a wonderful game is a terrible mistake. So, get into a bunch of wonderful businesses and stay with them.”

And it’s not like he’s not walking the walk – the common stock portfolio he oversees for Berkshire Hathaway Inc. (BRK.B) is filled with high-quality dividend growth stocks that he’s held for a long time.

With that in mind, I propose you skip right past the trading idea and move toward the second part of your plan, where you invest in stocks/funds for the long haul (along with the real estate).

I propose this not only because so many famous investors have done well, but because I’ve personally benefited to a very large degree.

You know how people talk about not having a dime to their name?

Well, I literally did not have a dime to my name back in early 2010. That’s because my net worth was negative, meaning I was below broke.

But I turned it all around by living well below my means and investing in wonderful businesses that pay increasing dividends.

I decided to hold these stocks for the long haul, allowing compounding and reinvested dividend income to work magic for me.

It worked so well that I went from below broke at 27 years old to financially free at 33 years old – just six years later.

And I lay the whole journey out in my “blueprint” to early retirement, which recounts the exact steps I took to get here.

In fact, many of the stocks I started buying seven years ago are still in my personal six-figure stock portfolio, which I publicly share for the world to see.

I’ve let time, compounding, and reinvested dividend income all work on my behalf. And they all continue to work on my behalf. Moreover, employees at the more than 100 companies I own a stake in work on my behalf.

This allows me to not work on my own behalf, if I so choose. That’s a wonderful life position to be in.

And it’s a position that most people in developed economies can be in, if they really want it and think ahead.

I say that because everything I’ve done is simple.

Easy? No.

Simple? Yes.

It’s just a matter of saving most of your net income and investing that excess capital into high-quality dividend growth stocks like those you’ll find on David Fish’s Dividend Champions, Contenders, and Challengers list – an invaluable compilation of more than 800 US-listed stocks that have all paid increasing dividends for at least the last five consecutive years.

And then you hold on to those stocks, allowing these businesses to essentially rain cash upon you.

High-quality businesses are able to do that because they tend to sell products and/or services that are ubiquitous and in demand by society.

Think the medicine produced by Johnson & Johnson (JNJ). Think the beverages produced by The Coca-Cola Co. (KO). Think the various industrial products produced by 3M Co. (MMM).

While these are three totally different business models, I can tell you they have something pretty unique in common: they’ve all paid an increasing dividend for more than half a century!

So whereas others might be dancing and out of this wonderful game, investors holding stock in these companies can be pretty assured that they’re going to collect more income next year than they did this year. And they’re very likely going to collect more income every year thereafter.

Not only are you more likely to be successful by being a long-term investor focused on great businesses, but it’s just plain easier.

Jumping in and out of the market is stressful and hard.

You have to follow macroeconomic trends, stock charts, political news, etc.

Meanwhile, I rarely do more than check in on the occasional financial report (10-Q, 10-K). It’s not like I have to babysit Johnson & Johnson.

Other than that, it’s collecting ever-larger checks, which isn’t very hard or stressful at at all. It’s actually quite the opposite.

But if this is a strategy you’re new to, fear not.

Fellow contributor Dave Van Knapp put together a great series of lessons on how dividend growth investing works and why it’s such an appealing long-term investment strategy.

And once you’re ready to potentially put capital to work, I publish an article every Sunday highlighting an undervalued dividend growth stock for that week.

In the end, though, it’s up to you.

You can dance in and out of a wonderful game.

Or you can let that game go to work for you and make you a lot of money.

The choice is yours, Chuck.

But I’d strongly recommend that if you chose to go the path of Buffett and the like, you get started right away.

Like I mentioned earlier, compounding needs time to really make its mark.

While it doesn’t necessarily take a very long time to experience amazing results – my results have come about in a pretty short period of time – the longer, the better.

I wish you luck and success.

Jason Fieber

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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.