Dollar Cost Averaging: Viable For Individual Stock Portfolios?

Includes: JNJ, KMB, KO, PG
by: David Crosetti

Like many working people, my company offers a retirement plan, which most of us know as a 401(k) plan. I get paid every two weeks and the money that I contribute to my 401(k) is invested for me by the plan administrator into a number of different mutual funds that I can select from. In addition to my own contributions, the company provides a contribution known as "the company matching funds." I have worked for this particular company for the last seven years. One thing that I pay attention to is the amount of my own money that I've contributed to the 401(k) plan, separate from the money that the company has added to my investments and separate from any gain or loss that my investments have had.

While we can spend a lot of time arguing the quality of the mutual funds in my program, suffice it to say I've done fairly well relative to my own investment and how much the plan is worth today. In the past, I had a tendency to look at my quarterly statements and fret over the ups and downs of my portfolio value. However, when I started looking at the reality of my own money set aside relative to the overall portfolio value at any given time, I found that my worries were lessened.

An investment like a 401(k) uses a strategy known as "dollar cost averaging." What that means is that you are putting money into the market on a schedule, without any regard for how the market is doing at any point in time. Sometimes the market is down and your money is purchasing more shares than those times when the market is up and you are purchasing fewer shares with the same dollar amount. Over time, you will purchase funds at a number of different price points and you should find yourself with a cost basis that is favorable to your investment.

Many dividend growth investors use a variance of this dollar cost average strategy in their individual stock portfolios. Many DG investors will often say that they welcome a pullback in the market, because they can purchase a given stock at a lower price, with a corresponding higher yield point. If the DG investor owns Coca-Cola (NYSE:KO), for example, with an initial cost point of $43 a share, then a pullback in KO's price to, say, $35 a share (for the point of illustration) would allow them to purchase additional shares of KO with a lowering of their cost basis and an increase in their combined yield point.

Some DG investors, who feel that a particular stock is priced at a value, make an initial purchase of that stock and then might add to their position if and when that stock rises in price, but still represents a value relative to the stock's intrinsic worth. In this type of dollar cost averaging, the investor is making his decision based on his own metrics of value. Some might argue that this type of dollar cost averaging is close to "market timing." That is, the investor might be completely wrong about the direction of the market (up or down), and as a result is putting additional risk into his or her investments. But I don't view it that way. In fact, as a person who reinvests dividends on a regular basis, I am practicing a form of dollar cost averaging by reinvesting my dividends at higher or lower market prices when I allow my reinvestments to be made without any regard to the current price of my holding in a particular position.

A few months ago, I wrote an article about dollar cost averaging with respect to Colgate-Palmolive (NYSE:CL). Now, I have had a "love affair" with a couple of stocks and they have been very good to me. Coca-Cola, Johnson & Johnson (NYSE:JNJ), Kimberly-Clark (NYSE:KMB), Procter & Gamble (NYSE:PG), and Colgate-Palmolive are companies that I have owned since 1984, and I have added to my positions in them over time with additional purchases as well as reinvesting dividends. From my perspective, these five companies represent quality. These are the largest holdings in my portfolio and while I do not consider myself a stock picker or a market timer, my experience with these companies has been profitable and beneficial to my growing dividend income stream.

Last night, I was sitting in my office and thinking about making some purchases of different companies with the recent market pullback. I ran a few screens and looked at a few analyst reports, but I have to admit that I was not convinced that the market is going to turn around, nor was I convinced that the market was not going lower. This is "indecision" from my perspective, and I will admit that there are plenty of times when that particular emotion comes over me. So, I decided to do a "what if" scenario.

The "what if" scenario was this. Suppose you were to invest $1,000 at a random point in time into purchases of particular stocks. What would the results be over a 10- to 15-year time frame? Would that strategy be a good one or not? There is a web site,, that has a calculator that allows you to see what $1,000 with dividends reinvested would be from various starting points up until today. I used a purchase date as close to June 15 of each year as possible and ran some stocks through the calculator just to see what kind of results I might get. Here's what I found using examples from my core holdings stocks:

Johnson & Johnson

Proctor & Gamble


Now, let's face it: Since market lows of 2008, these stocks and many others have performed very well. Will that continue? I don't know. But one thing that I have stressed over and over is that purchasing stocks at a value price is very important to overall success in the market.

There are times when a stock is priced at a value and times when it is not. Accumulation of shares, though, can be achieved through a market timing approach -- that is, deciding that "now" is the time to buy a particular stock, but that requires some measure of "nerve." For example: Those who have bought Hewlett-Packard (NYSE:HPQ) have done very well so far this year. Best Buy (NYSE:BBY) has been on a tear this year. There are many more examples of stocks that were value priced but that I would have never even considered a stock that I want to own as a DG investor.

Here's what I know: I like to purchase stocks that are priced at a value. I want companies that are leaders in their category and that have a long history of paying and increasing dividends. I want some reasonable expectation that those dividends will continue to grow into the future.

I don't take a "full" position in any stock. Instead, I add to my holdings with dividend reinvestment and additional purchases along the way. Back in 1984, I didn't just purchase Coca-Cola and then decide that I was done with it. There have been times along the way that I've added to my holdings of KO, KMB, CL, JNJ, PG, MCD, and most of the other companies that I own. I haven't used dollar cost averaging in the more traditional sense as I have in my 401(k), but by making additional purchases of stock in existing holdings that is what I have done, in reality.

I would hazard a guess that if there is a particular company that you really think is something you want to own, go ahead and buy it. There are a couple of things that can happen. First, the stock could go up in price. Second, the stock could go down in price. Third, the stock can remain flat. As a DG investor, here's what I am confident of: My dividends will continue to grow year over year, as long as I hold the stock and as long as the company continues to raise dividends every year. As an active manager, I have to determine whether or not to continue holding a stock based on my own metrics.

Disclosure: I am long KO, CL, PG, KMB, JNJ, HPQ. 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.