The bull market expansion over the past six years has been very enjoyable. But sunny days don’t last forever. Inevitably, rain will follow.
Just don’t overreact to the dark clouds. Keep in mind that when the pessimists take over, the stock market generally spirals downward. But it’s the optimists who end up making the big money. These are the people who are buying when everyone is selling.
That’s not an easy thing to do! And that’s why dollar-cost averaging (and dividend reinvesting) is such an important strategy during turbulent markets.
Even if you don’t possess a cool head, this strategy will help you overcome your tendency to overreact to short-term market conditions. It’s much better to be in a position to take advantage of the opportunity provided by those who do happen to lose their heads.
As an investor, you have to find a way to overcome your natural tendency to over react to the noise—regardless of whether it is optimistic or negative. The objective is to build wealth by logical purchases of high-quality companies… at relatively good prices.
Dollar-cost averaging, by its very nature, does just that. You determine a fixed dollar amount to invest, regardless of the market price. When prices are down, you buy more shares; and when they are up, you buy fewer shares.
Once you are enrolled in a plan, you can invest amounts of as little as $25 or $50 (or many thousands of dollars) to buy shares or fractions of shares. That’s different than the traditional way to invest, which is to pay brokerage fees when buying a certain number of shares.
With DRIPs, it is easy and efficient to invest the same amount of money on a regular basis. That’s because you don’t specify a number of shares to buy—instead you invest a specified number of dollars, and then, you get as many shares as those dollars buy.
For the purpose of dollar-cost averaging, it’s much easier to buy a certain dollar amount regularly than it is to figure out how many shares would equal that dollar amount.
Following a strategy of dollar-cost averaging, you are prevented from committing your funds at what might turn out to be a market high price. In fact, this strategy causes you to buy more shares when the price is low, and fewer shares when the price is high.
Therefore, YOUR cost is going to be even lower (much lower—if there is high volatility) than the average price.
And, if you are investing in a company that has no fees associated with the purchase, there’s no cost to making multiple purchases of a company’s stock over a period of years.
Everyone using DRIPs to accumulate shares through dollar-cost averaging can appreciate the joy of watching their share count grow over time as they continually contribute funds. In a volatile market, it is reassuring to know that your cost per share will necessarily be even less than the average price of the shares during the period that you invested.
And, your share growth does not come only from investments. Dividends are credited with contributing nearly half (46%) of the total return for the S&P 500 Index between 1989 and 2014. What’s more many DRIP companies have long histories of consistently raising their dividends.
Here’s a sampling of companies with histories of steadily increasing dividends that have recently raised their dividends. These companies all have no-fee DRIPs. For our complete list of companies that offer a No-Fee DRIP, Click here.
If you wish to enroll in the dividend reinvestment plan of any of these companies, there are many ways to so, including going through our affiliate, Temper of the Times Investor Services. Temper is a registered brokerage whose only function is to open DRIP accounts for individuals. Just click on the company name and you will be brought to the Temper order forms.
Until Next Time,
Ms. Vita Nelson is one of the earliest proponents of Dividend Reinvestment Plans (DRIPs) and a knowledgeable authority on the operations of these plans. She provides financial information centered around DRIP investing. She is the Editor and Publisher of Moneypaper’s Guide to Direct Investment Plans, Chairman of the Board of Temper of the Times Investor Service, Inc. (a DRIP enrollment service), and co-manager of the MP 63 Fund (DRIPX).