The Benefits Of Dollar-Cost Averaging Dividend Stocks Are Hard To Ignore
If you are wondering about the advantages of dollar-cost averaging into dividend stocks. Then you have come to the right place.
Since the benefits of dollar-cost averaging. Combined with the power of dividend stock investing. Well, it is a great one-two punch.
It means you can make good money off dividend income. While reducing the risks and emotions that come with stock market investing.
If those things are of interest to you. Then let’s get started…
Advantages Of Dollar-Cost Averaging Dividend Stocks
Based on my nearly 50 years of experience as a DIY dividend investor, I see these 7 benefits of dollar-cost averaging dividend stock purchases…
- A pile of cash isn’t readily available
- Dividend income is a steady source of funds
- Timing the market is difficult
- Purchasing when dividend yields are higher
- Buying fewer shares when dividend yields are lower
- Removing emotions as stock prices rise and fall
- Using a systematic approach to dividend investing
In a moment, I would like to cover each of these points in detail. So you will better understand why dollar-cost averaging is a good way to approach investing for dividends.
But first, a quick definition…
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
Dollar-Cost Averaging Defined
A dollar-cost averaging approach (DCA) means investing the same amount of dollars regularly. Usually monthly or quarterly.
By doing so, the investor buys more shares when stock prices are lower. And fewer shares when stock market prices are higher.
By consistently dollar-cost averaging into dividend stocks. Over the long run, it often (but not always) results in a lower total average cost per share.
Better yet, there are other advantages of dollar-cost averaging dividend stock investments. Specifically, the 7 I highlighted at the beginning of this article.
And these are the points I would like to discuss with you next. Shall we…
1. A Pile Of Cash Isn’t Readily Available
It would be nice if you and I had a big pile of cash at our disposal. To do with as we please. Or, to use for making a big lump sum investment.
But most of us aren’t in that type of financial situation. Since common sense tells us that cash comes to us in smaller regular amounts. Not in a big windfall.
Specifically, by making money from our jobs. Paying our bills. Then hopefully having a little left over for buying your dividend stocks at the end of the month.
Since this is the case for almost all of us who aren’t independently wealthy. That extra money each month is perfect for a dollar-cost averaging dividend stock investment strategy.
But there’s more. Consider this next reason too…
2. Dividend Income Is A Steady Source Of Funds
You immediately start earning a regular dividend income by investing in good dividend stock ideas. Since most dividend stocks pay dividends quarterly.
So, at the end of each quarter, you have a new supply of funds ready for investment.
Although your dividends will grow over time. They provide a consistent and steady flow of dividend income that is perfect for reinvestment.
Thus, your earnings from dividends increase your ability to take advantage of dollar-cost averaging into dividend stocks.
That’s right, dividend income from dividend stocks and dollar-cost averaging. They can go hand-in-hand.
Here’s another reason it’s a good combination…
3. Timing The Market Is Difficult
I don’t know about you. But I never know what direction the stock market is going.
Sure, I have hunches from time to time. But I’m wrong as much as I am right.
However, this is not uncommon. Most professional money managers can’t time the market either.
Meaning loading up on shares when stocks are about ready to rise. And selling those same shares before the stock market goes into the tank.
If you can do this? By all means, go for it and make yourself rich.
But investing involves risk. And for the rest of us who can’t time the market swings. It’s a great reason why dividend stocks are good for dollar-cost averaging.
Because as the market goes up and down, this is what happens…
4. Purchasing When Dividend Yields Are Higher (stock prices are lower)
Investing a fixed dollar amount on a consistent schedule means you will buy more shares when stock prices are lower. That is one of the basic principles of dollar-cost averaging.
But there is another important implication for a dividend investor’s portfolio. Specifically, dividend yields move in the opposite direction of stock prices.
So, when stock prices are down. And you are capturing more shares by dollar-cost averaging into dividend stocks.
Realize that at the same time, you are benefiting by investing in higher dividend yields. Thus, it’s the perfect time to buy.
Therefore, dollar-cost averaging helps you get into the dividend investing game. Because one of the biggest investing mistakes people make is not getting started in the first place.
Furthermore, DCA helps keep investors in the game at the right times. Specifically, when stock prices go down.
Most noteworthy, there are very few things that are sweeter to us dividend investors...
Like scooping up stocks when dividend yields are higher. Meaning more dividend income for the dollars invested.
If you are ready to get in the game now. I think you will like the Simply Investing Report and Analysis Platform. For finding and monitoring the best dividend stocks for your money.
Next, another good thing to consider…
5. Buying Fewer Shares When Dividend Yields Are Lower (stock prices are higher)
By dollar-cost averaging dividend stocks, you will buy fewer shares when stock prices are high. And not coincidently, that is also when dividend yields are low.
Thus, as the definition of dollar-cost averaging states. The strategy tends to result in a lower average price per share over the long run.
Therefore, increasing the dividend yield on your investment cost. And creating more dividend income per dollar invested.
Editor’s note: Because I must present a balanced view…
Since like anything in life, there are exceptions to every rule…
For example, if you used lump-sum investing. By putting all of your money in dividend stocks today. Then stock prices go straight up with no pause.
Your investment returns in this scenario are going to be impossible to beat through dollar-cost averaging.
On the other hand, stocks rarely go straight up. And they can go down and stay that way for long periods.
It’s times like this. That you will be very happy about your investment returns using DCA.
Furthermore, as I mentioned earlier, who’s got a pile of cash sitting around anyway. To take advantage of a lump sum investment?
This brings me to the final 2 points about why dividend stocks are good for a dollar-cost averaging strategy…
6. Removing Emotions As Stock Prices Rise And Fall
Emotions and investing do not work well together. Because it’s easy to get greedy and put all your money into dividend stocks when they are rising.
And way too tempting to dump your shares, when there is panic in the streets. As I said, stocks can go down a lot. And stay that way for a long time.
When this is the case, all you are doing is buying at high prices. And selling at lower prices. It’s a good way to lose money.
Thus, by investing a fixed amount regularly. And sticking with it through good times and bad. You take the emotion out of dividend stock investing.
And the risk of doing the wrong thing with your investments. At the wrong time.
We have come to the end of the line. With the last point on today’s list.
So, let’s address it. Then I will wrap up…
7. Using A Systematic Approach To Dividend Investing
If you want to supplement your retirement income with dividends. Or, better yet, live off your dividends in the not-too-distant future.
Understand that these are big and important goals. Taking time and patience to achieve.
And I can tell you for sure, that you won’t achieve your financial planning goals without a sound and systematic approach to investing.
For example, investing one month and forgetting to do so the next. Or, chasing the latest hot investment fad. Doing stuff like this just isn’t going to cut it.
That’s why adopting and sticking with dollar-cost averaging into dividend stocks is a great way to go.
But fully understand this next point before you go. The DCA approach will never save you from buying bad stocks or underperforming investments.
Thus, you may benefit from the Motley Fool Stock Advisor. For excellent stock recommendations delivered to your inbox every month.
Okay. That concludes our 7 dollar-cost averaging benefits. And how they apply to dividend stocks.
So, please allow me to wrap up with a few parting thoughts…
Advantages Of Dollar-Cost Averaging Dividend Stocks
The advantages of dollar-cost averaging are hard to deny. And combining the approach with the power of good dividend stocks held in a portfolio makes for a win-win combination.
By systematically investing a fixed dollar amount into dividend stocks regularly…
You can improve your portfolio dividend yield over the long run. And take the emotion and complexities of market timing out of the equation.
That’s all for today. Best of luck with your investments.
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Author Bio, Disclosure, & Disclaimer: Please join me (Tom) as I try to achieve my goals, find my next place to live, and make the most of my money. However, I am not a licensed investment adviser, financial counselor, real estate agent, or tax professional. Instead, I’m a 50-something-year-old, early retired CPA, finance professional, and business school teacher with 40+ years of DIY dividend investing experience. I’m here only to share my thoughts about essential topics for success. As a result, nothing published on this site should be considered individual investment, financial, tax, or real estate advice. This site’s only purpose is general information & entertainment. Thus, neither I nor Dividends Diversify can be held liable for losses suffered by any party because of the information published on this website. Finally, all written content is the property of Dividends Diversify LLC. Unauthorized publication elsewhere is strictly prohibited.