The Psychological Benefits Of Dollar Cost Averaging Into Dividend Stocks

Includes: AFL, CLX, DPS, GE, JNJ, PG, XOM
by: Tim McAleenan Jr.

When the benefits of dollar cost averaging are typically discussed, the focus is generally upon the fact that you are putting yourself in a position to achieve returns that mirror the long-term performance of the index funds or specific stocks that you choose to own. The obvious beneficial thing about dollar cost averaging is that you eliminate the risk of buying at market highs (the hindsight results of making a lump sum investment in 1999, 2000, 2007, etc. could be obnoxious), and you also increase the likelihood that you will continue to buy at market lows (if you find downward volatility difficult to embrace, a regimented program that automatically withdraws $200-$400 to invest each month can make it easier to buy through the downturns because the automatic investing potentially fights any paralysis you may feel during a market downturn).

Those factors are no doubt important, but today, I want to talk about the ongoing psychological benefits of executing a dollar cost averaging program. Scott Burns, a personal finance writer with a particularly strong talent to word things well, once said that he tries to construct a financial system for himself in such a way that he can "escape from having a life that consists of a long series of unpleasant financial surprises." When you dollar cost average into dividend stocks, you are taking active steps to not only escape from a life of unpleasant financial surprises, but you are putting yourself in a situation to receive pleasant financial "surprises" because you are taking the active steps to become an owner in an excellent dividend growth firm.

I know there is a tendency in the financial industry to overcomplicate things, but if something like this suited your temperament, you could put together a decent investing program on $200 per month.

You could visit the Aflac (NYSE:AFL) Investor website by clicking here and sign up to have $50 taken out of your checking account to invest in shares of the Japanese insurer.

You could visit Procter & Gamble's (NYSE:PG) website at and enroll to have $50 taken out of your account to buy shares of the consumer giant each month.

And then you could go to to have $50 invested into Exxon (NYSE:XOM) and Dr. Pepper (NYSE:DPS) each month.

Hardly anyone advocates this approach because there is not a whole of money to be made by brokers, salespeople, etc. There are no fees or asset overrides with this kind of program, and with no one to stand to benefit, DRIP investing can often be relegated to the "underworld" of investing. With those four companies listed above, you would pay no fees for your ongoing investments. None of those frictional fees would be lost to "the helpers", as Warren Buffett would put it.

And you'd get decent diversification, too. Those four companies represent: a billion-dollar soda company, Asian insurance exposure that has been compounding at double digit rates for the past generation, a consumer branding giant that has been paying out dividends without interruption since the 1800s, and an oil giant that can rightfully be considered a small country in its own right (if Exxon's profits were compared to a country's GDP, it would be approximately a Top #100 nation).

Here is where the psychological benefit kicks in: each month, you are buying $1.23 in annual Aflac income, $1.54 in annual Procter & Gamble income, $1.40 in annual Exxon income, and $1.61 in Dr. Pepper income. Adding it all up, you're buying yourself $5.78 in annual business income each month.

This can provide an enormous psychic benefit because it allows you to measure in concrete terms your march towards financial independence. If your goal is to receive $40,000 in annual business income from your common stock holdings in 2033, each month marches you 0.0144% towards that goal. The first year of dividend payments get you 0.1734% towards your goal. That sounds lame and pathetic at the surface, and sometimes can even be enough of a deterrent to prevent someone from following a dividend-focused strategy, but it completely ignores the "Holy Trinity" of wealth creation: the combination of fresh cash contributions, reinvested dividends, and dividend growth over long periods of time.

By the way, your options for DRIP investments opens up if you are investing large enough sums to make purchase fees nothing more than a rounding error on your overall transaction: for instance, General Electric (NYSE:GE) only charges $1 for each purchase, Clorox (NYSE:CLX) $0.03 for each share purchased, and Johnson & Johnson (NYSE:JNJ) only charges $1 for each transaction (and you can sidestep this fee altogether if you choose to mail in a check to Computershare's headquarters to purchase your Johnson & Johnson stock). The point is, you have options.

But sticking with the companies laid out in the original scenario: if you bought $600 worth of each of those four companies this year, the baseline expectation is that you would be generating $69.36 in annual income right off the bat (this figure incorporates some conservatism by not tallying up the quarterly nature of the dividend payments which would bolster the number if reinvested). As long as you could get an 8% dividend growth rate out of those companies, you'd be doubling your dividend income every eight years (and you could knock a year or two off if you choose to reinvest).

Over a thirty-two year investing lifetime, that $69.36 in annual income would turn into $889.64 in annual income, assuming an 8% dividend growth rate and no dividend reinvestment so that you could enjoy the fruits of your labor along the way. While you were getting sixteen dividend payments automatically deposited into your checking account each year, that $2,400 in first year seed capital went from representing 0.1734% of your annual income target to 2.22%. This is what a realistic "best case" scenario can look like. When it comes to investing, the best thing is to have a lot of money to work with from the beginning. If you don't have that, the second best thing you can do is give your capital time to do its thing.

I like Scott Burns' advice about structuring your life so it doesn't have to be a series of unpleasant financial surprises after another. A dollar cost averaging program into dividend growth stocks is a great way to structure your life in such a way that enables you to regularly receive positive financial "surprises" over the course of your life. With each capital outlay you make into a traditional dividend growth stock, you are setting yourself up to receive four pleasant infusions of cash each year. A strategy is only worth following if you can stick to it, and if you craft a strategy that actually comes with psychological benefits, you are way ahead of the game. No one ever talks about it, but don't be afraid to make your investing strategy fun.

Disclosure: I am long DPS, GE, JNJ, PG, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.