The past several years have been difficult for investors, so it’s not surprising that many people are choosing to wait on the sidelines. They are pulling money out of the stock market because they are confused.
Some seemingly smart people are calling for a collapse of the dollar… and the markets with it. Others are saying to ride the cycles; and still others say to fully commit as we are on the cusp of a historic bull market. It’s hard to be rational in such an irrational environment.
Sitting on the Sideline is Rarely Worthwhile
According to a report released in July by McGraw Hill Financial, dividends have contributed nearly a third of total equity returns since 1926. What’s more, according to Bloomberg Business, on a pretax basis, dividends have accounted for nearly half (46 percent) of total return for the S&P 500 Index between 1989 and 2014.
Put another way, if you’d reinvested all dividends received since 1989 into buying additional shares of stock, your total return would be nearly double the return than if you’d done nothing.
It should come as no surprise that investing in America’s finest dividend-paying companies and sticking with them over the long term has proven to be the most reliable way to generate inflation-beating returns.
So, forget about trying to decide which way the market will go and when. The time to get into the market is now… as long as you can invest according to a strategy that you will be comfortable staying with.
Dollar-Cost Averaging is a Good Game Plan
Dollar-cost averaging into a diversified group of high-quality, dividend-paying companies is such a strategy. You are protected from possibly buying into the market (or into a specific stock) at what will turn out to have been the worst possible time. It’s the approach taken by the world’s most successful investors (that is, identify a widely diversified portfolio of high-quality companies and continually build up holdings in these companies).
Investing through direct investment plans (DRIPs) is the ideal way to implement that approach.When you invest through DRIPs, you can start out with just a single share of stock and regularly invest even tiny amounts to build wealth steadily over the long-term, without paying special attention to any swings in the market. Indeed, investing in this manner makes market volatility work for you.
How so? By investing the same amount regularly, the average cost of your shares will turn out to be even less than the average market price that those shares were selling for during the period you invested. That’s because your dollar-amount investment buys more shares when the price is low and fewer shares when it is high.
While many will feel encouraged to get off the sideline with this approach, others may need guidance as to appropriate portfolio holdings.
Each year, an elite group of stocks is distinguished for having paid increasing dividends for more than 50 consecutive years. This year, there are 16 companies that have met that high standard. Of those, there are four companies that offer direct investing with NO FEEs for investing and NO FEEs for reinvesting the dividends. You may wish to include one or more of these four great companies in your portfolio: Johnson & Johnson (JNJ), 3M Co. (MMM), Genuine Parts Co. (GPC) and Emerson Electric Co. (EMR).
These companies are just a few of the nearly 1,300 companies that allow you to invest directly. There’s plenty of help to identify high-quality DRIP portfolio components.
If you intend to make small regular investments, I suggest you limit your selections to companies that don’t charge fees for optional cash investments and reinvesting dividends. You can see a listing of every No Fee DRIP here.
To get started on such a conservative investing approach, you would first decide how many companies you want in your DRIP portfolio and then how much you can reasonably expect to invest regularly in each. Keep in mind that DRIPs are probably the only way to make petty cash work for you in the stock market. That’s because investments of as little as $25 or $50 are acceptable investment amounts for many DRIPs. Where else can you put $25 to work in the stock market?
By regularly putting even such small amounts into shares (or even fractions of shares!) over the long term, the dividends thrown off by those shares will compound and provide substantial wealth.
In my next article, I’ll prove that point by demonstrating the power of compounding. You’ll discover that time is your greatest asset… so the sooner you start the better your results.
Don’t wait on the sidelines, falling victim to inertia driven by fear of doing the wrong thing. The right moment to enter the market is now, regardless of the short-term direction it may take.
Until Next Time,
Vita Nelson is an acknowledged authority on the operations of company-sponsored direct investment plans (DRIPs). Ms. Nelson now provides financial information centered around DRIP investing.