The Benefits of Dollar Cost Averaging and Reinvesting Dividends

The Benefits of Dollar Cost Averaging and Reinvesting Dividends

March 14, 2023
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Long-term investors who are saving for their retirement know the benefits of dollar cost averaging and dividend reinvestments. Before explaining the benefits, let us define the terms dollar cost averaging and dividend reinvestment.


What Is Dollar Cost Averaging?

Dollar cost averaging involves regularly investing the same amount of money into a diversified portfolio regardless of the state of the economy or how the stock market is currently performing. An investor following a dollar-cost-averaging strategy contributes the same amount of money into their portfolio on a consistent basis. The best example is a participant in a 401k. The employee invests the same amount per pay period.


Proponents of dollar cost averaging aren't concerned about short-term market fluctuations. They see downturns as an opportunity to buy more shares at a discount.


What Is Dividend Reinvestment?

Anytime a company makes a profit at the end of a quarter or year, the company's board of directors has three options. The company can issue its stockholders a dividend for each share they own, it can pay down existing debts, or the business can use the earned money for

expansion purposes. Some companies use a combination of these options when forming their dividend policy.


If a company decides to issue its shareholders a dividend, those shareholders have choices to make as well. A shareholder can choose to keep the money, reinvest the dividend by purchasing new shares in the company, or put the funds toward share purchases in another business.


Many long-term investors choose to reinvest the money they earn from dividends into additional shares with the same company.

What Are the Benefits of Dollar Cost Averaging and Dividend Reinvestment?

Both dollar cost averaging and dividend reinvestment allow investors to solidify their returns over time. When stock prices dip, investors reap the benefits of reinvesting in more shares with their contributions. When prices rise, they profit from the increased value of their portfolios.

Over time, as the investor owns more shares in the company, the amounts they receive from the dividends also increase, allowing them to purchase even more shares.


Let's consider an example using the below chart:

In this hypothetical example, an investor purchases $500 worth of stock in a single company monthly over six months. Their initial investment is for 12.5 shares at a value of $40 each. In the fourth month, the stock's share price drops to $24. The investor then obtains 20.8 shares in the

company with their $500 monthly contribution.


By the sixth month, the share price has returned to $40 — but the overall value of the investor's portfolio has increased. Although the investor has spent $3,000 over six months on their portfolio, it is now worth $3,413.89. The average share price over the six months was $37.

Following their dollar-cost-averaging strategy, the investor has purchased 85.3 shares at an average of $35.15 — a much better deal!


How Does Winston Wealth Advisors Help?

At Winston Wealth Advisors, our financial advisors set up systematic investments that clients can adjust at any time. Individuals can choose to invest a certain amount per week, month, or quarter through an individual retirement account, a joint investment account, or another investment vehicle.

The contribution is automatically withdrawn from the investor's checking account and used to purchase long-term investments. Dividends can also be automatically reinvested using our trading platforms at LPL or with assets held directly at fund companies like American Funds.


How Much Should I Automatically Each Month?

Everyone's financial situation is unique. The wealth managers at Winston Wealth Advisors will help you determine how a systematic investment plan may work in your favor based on your personal financial plan.




Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.


All performance referenced is historical and id no guarantee of future results.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.