Dollar Cost Averaging: Delivering Above-Average Portfolio Returns

Summary

• Dollar cost averaging has long been known to be an effective investing strategy.
• Out of curiosity, I decided to take an in-depth look at the power of DCA within my real money portfolio.
• It is clear that increasing the number of days in which you invest has led to an increase in returns since the beginning of 2022.

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Background

I have always been motivated by the teachings of Warren Buffett and Benjamin Graham, using their methods as the foundation for my investing style. This is particularly noticeable in my dividend growth income article series where I track the monthly growth of estimated annual dividend income. The basic strategy behind growing my dividend growth portfolio centers around the purchasing of quality dividend growth stocks and systematic weekly investments. By combining both of these factors I have substantially grown my annual dividend income and have outperformed the market in the process.

Out of curiosity, I will explore the influence that dollar cost averaging frequency has on the performance of a portfolio.

Dollar Cost Averaging Frequency

First I'd like to take a look at how the frequency in which a dollar cost averaging strategy is applied affects the overall returns of a portfolio. Using the numerous tools available on Portfolio Visualizer, I was able to illustrate the effect investing frequency has on returns. To simply visualize the effect, the sample portfolio is consisted of 100% allocation in the S&P 500 (SPY). Here is the summary of the inputs that were used for my analysis:

• Starting portfolio value of $164,092. Equal to the starting value of my real money portfolio
• Investment time period of Jan. 2022 through Feb. 2023
• Investing frequencies of monthly, quarterly, and annually
• Contributions based on $1,100 monthly. Equal to the contributions of my real money portfolio
• All contributions made to SPY
• All dividends reinvested

Recurring Investment Frequency (Portfoliovisualizer.com)

After running each of the investment frequencies, a clear trend emerged. The more often the investing frequency was, the greater the overall returns became. By investing monthly into this portfolio, you would have an end balance that is roughly $2,700 larger than if you have had just invested a lump sum annually.

For the next step of my analysis, I will look into the details of real money portfolio and compare the returns to that of the simulations that were ran here.

Real Money Portfolio

Some of you may be followers of my monthly article series detailing my dividend income growth from employing my investing strategy. For those who don't follow, a high level summary is my investing strategy involves investing $175 every week with new capital, buying dividend growth stocks, and reinvesting all dividends. This strategy has performed quite well for me and has allowed me to substantially grow my annual dividend income through this simple method along with a couple larger one-time investments.

In the past few months I have become interested in seeing how often I am actually growing my portfolio. I have measured the total number of transactions (new purchases, dividend reinvestments, and dividend growth announcements) so far in 2023 as well the number of different market days in which a transaction took place in order to understand my true frequency. As currently projected for the first three months of 2023, I will have experienced a total of 93 transactions across 41 different market days. So without further ado, let's look at how my real money portfolio has performed.

My Portfolio Returns (Fidelity.com)

Much to my excitement, my portfolio has outperformed the monthly contributions performance of a pure S&P 500 portfolio. In fact, it delivered almost exactly 1% greater total returns over the past 13 months. While several factors play into that outperformance other than investment frequency such as stocks invested in, I only care about the top level result which has been alpha-producing. At least for the timing being, this gives me confidence in my strategy and the inspiration to continue applying this method moving forward. In the name of transparency and to provide more frequent updates for Seeking Alpha readers, I've created a real-time transaction tracker for my portfolio so you can see my dividend income growth as it happens. If you are interested in following along, please find the tracker here. You can see my progress so far this month and how every transaction counts.

Dividend Income Growth - March 2023 (dividendsengineer.com)

I've added over $55 to my forward dividends so far in March with several large dividend reinvestments still coming at the end of the month.

Takeaways

My main goal for reporting my monthly dividend income growth and creating the real-time transaction tracker is to provide inspiration to newer dividend investors or those who are tentative on the benefits of frequent investments. Based on my experience, the combination of frequent dollar cost averaging and dividend growth investing has provided outstanding returns and is helping me reach my dream of early retirement. An interesting fact I noticed about my portfolio, based on a projected $212 increase in annual income from my strategy since the beginning of 2023, is that I am actually adding $2.36 every calendar day to my annual dividends.

The results found in my study are exciting, but it is of course important to understand the flip-side. I have benefitted from dollar cost averaging in a down market, mitigating my total portfolio losses. This strategy may not result in the same performance in a strong bull market, possibly hindering my total upside. However, I feel as if there is more than enough historical data available to show the benefits of dollar cost averaging in the long run, no matter the current market environment. Secondly, it is important to always perform due diligence on investments and avoid problematic stocks. My largest holdings consist of Microsoft (MSFT), Visa (V), Analog Devices Inc. (ADI), American Tower Corp. (AMT), and the Schwab U.S. Dividend Equity ETF (SCHD). Through hours of research I have determined these to be high-quality investments with strong future outlooks.

Summary

I have enjoyed seeing the growth in my dividend income over the past 13 months and look forward to what the next few years bring. Once you begin dividend growth investing, it becomes addictive and I look forward to seeing the growth in my income every day. It's critical to know that not all investors have the same strategy or the same goals for their portfolio. However, I am hoping the transparency and results witnessed from my portfolio will help inspire new investors or inspire seasoned investors to begin tracking their investments with more detail.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MSFT, V, ADI, AMT, SCHD either through stock ownership, options, or other derivatives. 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.