We’re setting up for a volatile 2022, which means this is the perfect time for us to trot out the time-tested dividend-investing technique we’re going to look at today.
It works well during sanguine times. But when the markets get rocky, this “buy low” method really shines. It’s our way to buy more shares when our favorite dividend stocks are in the bargain bin. We can think of it as the ultimate market-timing tool for income investors.
You’ve probably used a version of this technique to build your current nest egg. Methodically investing a set amount of cash is known as dollar cost averaging (DCA). We’re going to build on DCA to maximize our dividends and set us up to potentially double our cash (or better!).
Specifically here’s what this “dividend DCA for 2022” strategy will do:
- Let us buy stocks gradually, cutting our volatility (and letting us sleep at night, no matter what the economy or Jay Powell do);
- Give us bigger dividend payouts than folks who buy the same stock all at once. If we reinvest our dividends, we get a “dividend momentum machine” that rolls on its own, “automatically” boosting our payouts every quarter without us having to do anything at all.
- Boost our gains by letting us roll our extra cash into our favorite dividend payers on pullbacks (the signal for when it’s time to do this couldn’t be clearer, as we’ll see in a second).
Dollar Cost Averaging On Steroids
The best way to show you how this savvy approach works is to put it in play with the kind of stock income seekers are always on the hunt for: a high yielder with a stable payout that’s backstopped by a “recession-proof” business.
Consumer-staple king General Mills (NYSE:GIS) fits the bill, producing baked goods, cereal, yogurt, ice cream and other foods that are in demand no matter what the economy does; it pays a 3.1% dividend (more than twice the payout on the typical S&P 500 stock) that’s safe, accounting for just 50% of General Mills’s free cash flow. That’s the high margin of safety I demand in a dividend payer.
GIS is also the perfect stock for our strategy because it tends to rise in a two-steps-forward, one-step-back way, giving us plenty of chances to buy cheap, then ride higher on the share price’s next wave.
GIS Gave Us Many Buy Windows In ’21
So let’s set up a scenario where we had $600 to invest in GIS at the start of every month in 2021. In five of those months—January, February, March, August, and September—the stock traded below $60 (you can see those dips on the chart above), so our $600 would’ve gotten us 10 shares a month, more than in the other months.
That, in turn, would’ve nicely set us up to ride the stock’s big gain in the fourth quarter: as you can see above, from the time of our last “bargain” purchase in September 2021, GIS took off, and we would’ve been nicely set up to ride along, having built an 86-share holding before that late-year surge started.
During that surge, when the share price broke north of $60, we would’ve naturally bought fewer shares, nicely hedging us against the risk of overpaying.
That’s not the end of our DCA magic, either: because we bought in monthly over the nearly 12-month period, the average purchase price on our 12 monthly GIS purchases was $59.84. That’s well below the current price of $65.99 and the stock’s average trading price during the year of $62.40.
A Clear Signal That It’s Time To Buy More
It gets better still, because if we’d kept some dry powder on hand for moving into the stock when it pulled back from our previous month’s buy price, we’d have boosted our gain even more!
Take September, when GIS pulled back to $57.70 from $59.37 at the time of our August purchase (you can see the dip in the chart above). Bulking up your buy then would’ve netted you a 14% return on your purchase in the nearly four months since, beating the stock’s 12% gain on the entire year.
A Natural “Dividend Amplifier”
Then, of course, there’s the dividend. Over the course of the year, we’d have “automatically” bought 170 shares of General Mills that would now be generating $346.80 a year for us in dividends.
Divide the stock’s yearly per-share payout ($2.04) into our average buy price of $59.84 and you get a 3.4% yield, which is about 10% higher than the stock’s current yield of 3.1%. And of course, you could roll your dividends back into General Mills (or another high-yield stock or fund!) and build out your income stream even more.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."