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As a dividend income investor, I have purchased stock in a variety of ways. Over the past 5 years, I have made lump sum investments in some great companies like Johnson & Johnson (JNJ), Procter & Gamble (PG), and McDonald’s (MCD) to name a few. Each of these purchases were made with one time investments of around $1,000 per transaction.
On other occasions, I have purchased stocks by setting up automatic investment plans through various brokers. Throughout a given year, I may have 5 to 10 different automated investments setup in order to buy smaller lots of stock one month at a time.
While I continue to use both methods of buying stock today, I tend to use automated monthly investments more than lump sum investing. The main reason is that I normally don’t have enough funds each month (~$500) to take advantage of lump sum investments.
By investing month to month, I have built up positions in several other great companies like Clorox (CLX) and Lockheed Martin (LMT) through their Direct Stock Purchase Plans. Other commission free brokers like LOYAL3 have allowed me to build up my investments in Coca-Cola (K), Microsoft (MSFT), and Wal-Mart (WMT) one month at a time.
For a list of companies we currently own, please visit our dividend stock portfolio page.
While I still plan to make lump sum investments in the future (just bought AFL & BHP through lump sum), I think setting up automated monthly investments has several advantages to the new investor.
Here are 5 reasons you may want to start buying stock one month at a time.
5 Reasons to Invest One Month at a Time
For over the past 5 years, I have been investing small amounts of money each month into several different stocks. In that time, I have built up decent (not huge) size positions in over 20 stocks. While I have not come close to meeting my long term investment goals, monthly investments allow me to put my money to work sooner rather than later.
Here are a few other advantages to investing one month at a time –
1 – Dollar Cost Average – I don’t have a lot of money to invest each month and certainly don’t have the patience or knowledge to buy stocks at their low. While I have a pretty good idea if a stock is overpriced or under priced (see the Graham Number), I don’t want to sit around waiting to invest on a dip.
That is why I prefer to spread my stock purchases out over several months to dollar cost average. Instead of buying a stock with a lump sum, I can average out my purchases over many months which results in paying a fair market price.
2 – Fractional Shares – Most automated investment plans require a fixed dollar amount be invested each month. As a result, investors can take advantage of buying fractional shares of stock.
If I couldn’t buy fractional shares of a stock, then I would not be able to let my money work for me now. In many cases, I would not be able to afford even a single share of stock based on the current share price.
For example, each month I buy less than a single share of Wal-Mart (WMT) stock. I usually invest $25 – $50 each month in the stock. With Wal-Mart’s current share price in the $80’s, I would need to invest a lot more in the stock each month if I couldn’t buy fractional shares.
3 – No Commissions – All bets would be off on this type of investing if I was paying commissions. It would not be logical to make several purchases each month if you had to pay a commission for each transaction.
However, as new brokers like LOYAL3 and Robinhood pop up, investors like me can take advantage of small and frequent stock purchases with zero commission trades.
4 – Totally Automated – Investing small chunks of money each month can be easy with automated investments. As long as you have enough funds in your checking/savings account to cover the purchase, there is not much maintenance at all.
Of course, in order to be a successful dividend investor, you still need to keep up with your portfolio holdings. So while you still need to track your investments, automated investments can reduce the amount of time you spend building your income stream.
5 – Diversification – Making small automated investments each month has allowed me to diversify my dividend income portfolio. Instead of being invested in over 20 stocks, I would likely own no more than 15 companies (but probably closer to 10) if it wasn’t for automated investments.
One of the biggest things I learned from my past investment career (before I became a dividend investor) was that a non-diversified portfolio is very risky. I don’t plan to make that mistake this time around!
It is important to point out that there are a few disadvantages to monthly automated investment plans. For example, the price you pay to buy a dividend stock through LOYAL3 may not be the market price you could pay through a different broker. Because they batch their transactions, investors may be paying a little more to own the stock. I personally don’t worry about this too much at this point. It is still cheaper for me to save on commissions by using LOYAL3.
Another disadvantage to buying stock through automated investment plans is that you may be putting your money into the wrong stock. For example, you may be purchasing shares of Wal-Mart (WMT) every month through LOYAL3. Even though you are saving on commissions and buying fractional shares, there could be other dividend paying companies trading at a discount. That is why it is very important to still take the time each month and track all of your investments to make sure you are investing in the right stocks.
While month to month investing certainly has some disadvantages, I still believe these automated investment plans can be great tools for the new investor to build their portfolio.
What do you think? Buy stock through lump sum investments? Set up automated monthly invests? Or a combination of the two?