Better than Average
(Dollar-Cost average)

The simple way to higher returns

Many investors are afraid of buying a stock today only to see its price fall tomorrow. This is unlikely when you dollar-cost average. This concept is simple, yet very few investors use it. Using this strategy, your cost will be substantially less than the average price of the shares during the period you are investing! That’s because you buy more shares when the stock is selling at lower prices and fewer shares when it is selling at higher prices. Of course, this technique is only appropriate for those who invest with a long-term outlook (five years at a minimum). It will not produce results for traders looking for a fast buck.

Using DRIPs, you can invest a certain dollar amount on a regular basis. This is called dollar-cost averaging. Result: You get more shares at lower prices and fewer shares at higher prices. Do this regularly with a no-fee DRIP and you will build wealth in the most cost-efficient way possible.

How dollar-cost averaging boosts your returns

The following examples demonstrate how your results can be dramatically improved if you dollar-cost average with DRIPs. They assume you are investing in a stock that has a no-fee dividend reinvestment plan. Such plans can be found using the tool on our search for DRIP page. (If a stock does not have a dividend reinvestment plan, or charges fees associated with its plan, these costs would have to be factored in.)

First, you must decide how much will invest on a regular basis. To keep the math simple, we'll use $100.00 as our quarterly investment amount. (Most DRIPs have a $25 minimum investment, and allow you to invest weekly or monthly.)

We have assumed four market prices for the illustration below--$12, $9, $30, and $35. The average price is $21.50. Our $400 investment bought 25.6345 over the four quarters. The average cost of those 25.6345 shares is $15.60.