When you see a slew of losses in your brokerage account, it’s easy to get an itchy trigger finger for that sell button. There’s not much that’s certain about the market, but I’m positive that stocks go up and down every day.
Sometimes, there’s a good reason why a stock spikes—the rollout of a blockbuster new product—or it crashes after a dividend cut. Most of the time, it’s nothing more than investor emotions du jour that sends a stock climbing or falling. And because of how market dynamics work, once a stock heads in one direction or the other, the move tends to accelerate.
Investors start to wonder if others know something about a stock that they don’t. So, more buyers or sellers jump on the bandwagon… and the movement in either direction accelerates. Further amplifying the whole situation are trading algorithms and software making automated trades that can jump into and out of the market in a split second.
As we start to wrap up the year, we only have 36 trading days left. Investors are clinging to every tidbit of economic data that has them rapidly tottering between pessimism and optimism.
Now is not the time to hit the sell button on any of your long-term holdings. Instead, as the market prices in uncertainty, it’s time to add to those high-quality dividend positions.
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Ignore the Crowd and Boost Your Yield
I’m a dividend investor… and since you’re here, I’m assuming you are, too. For the most part, I don’t plan on holding any of my stocks for less than a year. Honestly, I plan to hold most of my stocks for years. I believe in the motto “time in the market is better than timing the market.” I do, however, look for deals and special situations where I know I probably won’t hold the stock for a long time.
Arguably, the most important number to an income investor is yield because it measures how hard our money is working for us.
Using the formula above, you can see that yield and share price have an inverse relationship. When the share price moves in one direction, a stock’s yield moves in the opposite direction. When share prices go down, yield goes up. Bad news is also good news.
When the market dips—taking your stocks along for the ride—it’s important to view that as an opportunity for your money to work even harder for you—and not a reason to click the sell button.
You Can Use This Strategy All the Time
Instead of trying to buy when the markets drop—which requires more time watching your stocks than I like—you could use a dollar-cost averaging (DCA) strategy. This is the practice of investing a fixed dollar amount into the same stock spread over regular intervals.
It’s a favorite strategy of value investors like Warren Buffett and a great way to lower the stress of trying to time the market. Better yet, it can help you lower the overall cost basis of your position.
Here’s an example of how it works. Let’s assume it’s January 25, 2022, and your goal is to own $10,000 worth of Bank of America (BAC) shares. The stock has just slid for two weeks, and you thought it had surely bottomed.
Without using DCA, you would have bought 220 shares at $45.43 per share for a total cost of $9,994.60. And you would have watched your shares trade lower and lower for five months, kicking yourself for missing out on a better price.
Instead of buying all your shares at once, you could have spread the money out using DCA. Here’s what would have happened if you made five investments of $2,000 over those five months.
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In a perfect world, we would make every stock purchase at a bottom, but that only happens in hindsight, and then, it’s too late.
Instead of stressing out about timing your stock buys, especially for your long-term positions, have a strategy that allows you to buy more shares at a discount. Use it on a set schedule, or just add more shares on down market days.
For more income, now and in the future,
- boost dividend income
- dollar-cost averaging dividends
- don’t time the market for dividends
- long-term dividends