Dollar cost averaging is a type of investment strategy that has been used successfully for many years. When you combine this with a dividend reinvestment strategy, it can become very powerful. Here are a few things to consider about dollar cost averaging with dividend reinvestment.

Dollar Cost Averaging

The concept of dollar cost averaging involves making a regular purchase of a security on a certain interval schedule. For example, you might decide to invest $100 into a particular stock every month. By doing this, you are going to be able to negate the impact of market fluctuations. When the price of the stock is down, you are going to buy more shares. When the price is up, you are going to buy fewer shares.

Dividend Reinvestment

Dividend reinvestment is a strategy that involves taking the money that you receive from dividend payments and using it to purchase more stock. By doing this, you are going to increase the amount of shares that you own in a particular company. Since you’re dividends are calculated based on how many shares you own, you are going to essentially be increasing your dividend payment every time.

When you engage in dividend reinvestment, you are essentially using a dollar cost averaging strategy. You are going to take the money that you receive from dividends and use it to immediately purchase more stock in the same company. This is a dollar cost averaging strategy. By doing this, you are going to ignore market conditions and simply buy as many shares of stock as you can.

Combining the Two

By combining the two strategies into one, you are going to have a very powerful investment tool. With dollar cost averaging, you are going to need to set aside a particular amount of money to invest in your stocks. Instead of taking all of the money out of your own pocket, you could use the amount of dividend that you receive and then make up the rest. For example, let’s say that you decided to invest $500 into a stock every quarter. If you receive a dividend payment of $100, you would take that $100 and then add $400 of your own money. You would buy $500 of stock, but you would only have to put $400 of your own money into the transaction.

Using another approach could net even better results for you. Instead of making up the difference with your own money, you could agree to make the same payment regardless of how big your dividend is. For example, let’s say that you decided to put $500 of your own money into the stock every quarter and use the amount of dividend that you receive to buy stock as well. In the previous example, you would actually be buying $600 worth of stock with $500 of your own money. By doing this, you are going to be able to increase the amount of shares that you own very rapidly and build your portfolio.

$7 Online Trading. Fast executions. Only at Scottrade