There was a question posted by a reader that I thought would make an excellent topic this week. When investing in a dividend paying company, should you wait for the stock price to dip to a target price or should you just buy in at any time?
I've read a lot of articles and stories on people who have been investing for over 40 years and and never cared about what the price was at. They just kept re-investing their dividends and purchased more shares when they had the capital in the companies they thought were performing well and have been very successful with this strategy.
Once you have enough dividends rolling in to purchase full shares, you can set up a dividend re-investment plan or DRIP to have your dividends buy more shares automatically. Using DRIPs allows you to purchase shares without paying a transaction fee and at a slight discount, depending on the company you invest in. This compounding will allow your investment to grow with the least amount of maintenance. The downfall of DRIPs are that you are forced to buy shares automatically at the current market price. Also, DRIPs take a longer amount of time to be more effective. It really depends on each individual investor to research if DRIPs are right for them.
I've also read many news articles and investment strategies of investors who carefully monitor the market and save their dividends and investment capital to buy when stocks are attractively priced with excellent yields for maximum return on their investment.
Trying to time the market is one of the hardest things an investor can accomplish. Unless you are an advanced day trader with professional software that can monitor the best time to buy, it's going to be very difficult to hit the buy button at the most opportune time. One thing you can count on is market corrections to lower stock prices. Depending on how drastic the correction is, you could see your target buy price for a favored stock pop up before you know it. I remember when I wanted to buy Fortis and the stock price was hovering over $28.00 with a 3.8% yield and I thought the price would never drop to get a yield of 4%. A few weeks later it dropped to $27.50 and I bought thinking I snagged a good deal. The next day it dropped even lower and I could have had a higher yield. FTS slowly recovered and a few months later there was a huge drop in the stock market; the one where someone sold a whole bunch of stock and caused the market to plunge in minutes. I know people who picked up Fortis for like $25-$26! You never know when a super buy is going to reveal itself, so the only thing you can do is have funds waiting to make this strategy work.
I prefer to buy shares when the price is right for the time being until my portfolio is established. Buying larger batches of shares at bargain prices means less work down the road as you sit and watch your yield grow with each dividend increase and stock split. Some might argue that you don't see as much compounding growth with this strategy, but I disagree because each share is bought more efficiently with a lower amount of capital which makes up for the discount that DRIPs allow. I'm not really at the stage where DRIPs would be efficient anyways, but if you are at the point where you can DRIP more than 50 shares with each dividend payment, you probably don't need to read this blog! I always look at a stock's 52 week High and Low to gauge if a stock is at a decent price or not. I tend to buy when it's closer to the low, and when it's closer to the high side I tend to hold off and wait for a better opportunity.
Like anything in life, there are consequences to everything you choose. Buying stocks when the price is right can have you waiting for a while, missing out on a few dividend payments or missing out on a slight gain with a stock split, forcing you to buy shares at a slightly higher price than if you had purchased them prior, for example:
Let's say there was a solid blue chip company that raised it's dividends each year called Super Amazing Inc. The stock is listed as SAX, and priced at $70 per share. Investor A knows the company is solid, and has dividend increases each year so he invested $7000 to buy 100 shares of SAX. Investor B knows that Super Amazing Inc. is a solid company as well but thinks the price is too high for the yield it pays in dividends. The stock slowly increased to $80, then $85 and was hovering between $83- $85 for six months. The board of directors decided to split the stock to $45 per share and investor B decides to buy 200 shares of SAX since it's priced so low. Investor A still has a better yield because he now has 200 shares from the split as if he purchased them for $35 rather than investor B who bought 200 shares at $45.
Whether you wait for the right price or you buy whenever the funds are available, the most important thing to keep in mind is that you invest your money in a solid, dependable company with a proven dividend growth history. As long as you keep investing in the right companies, your investments will always be profitable.
There really is no right answer as each investment strategy is proven to work; it really just depends on the individual investor's mindset and how long your time line is before retirement.
