Tuesday, May 28, 2013

Rising Stock Prices: Dividend Investor Paradox

As an amateur investor I try to look for clues in the news to make a guess as to which way the markets could possibly turn. In 2012, it seemed like economic uncertainty in Europe kept the markets bouncing up and down each week. It allowed me to invest in stocks without worrying about paying too much. Now in 2013, the markets seem to be rising with no end in sight. May has totally thrown me for a loop as markets continue to climb when they usually fall; just like the price of a stock after I hit the buy button.

 Don’t get me wrong, I love the fact that my investment accounts are at an all time high as I write this article. Dividends are being deposited like clockwork each month and my passive income is growing well above the rate of inflation. The problem I find myself dealing with is when to invest my money so that I make the most efficient use of my investment capital.

Since I can only afford to buy shares in lots of 100, I’m obsessed with buying in at the most opportune time. I don’t have a crystal ball telling me the best time to buy in, so I am often forced to “wing it” which hasn’t always worked in my favor. When I purchase shares in a dividend stock, the stock price usually goes down lower then what I bought in at. Eventually the stock price recovers and I feel my purchase is justified.

(If we could get past the first world problem jokes, I’d like to address the issue of the dividend investor paradox, thank you)

Dividend Investor Paradox

Every investor likes to see their investment portfolios increase in value. Dividend investors, though, like to see a great price point so their yield on cost is as high as possible. As the stock price goes up, the yield goes down and the return on investment is lower. I like to think of this thought process as the dividend investor paradox.

Unfortunately you need stock price growth to bring forth dividend growth which means you can’t have your cake and eat it too. Some might argue that dollar cost averaging with DRIPs is an easy way to invest efficiently over time. I have yet to find any proof that dollar cost averaging will beat low price points. If you are going to hold stocks for many years, does it not make sense to have the largest yield on cost as possible rather than an averaged down yield over time?

So Now What?

 Waiting for the perfect time to buy a stock is an impossible feat. You never know for sure which way the markets are headed from day to day, no matter how many charts and figures you study or how many degrees related to finance you have hanging on your wall. I’ve learned that the only way to buy at the right time is to pick your own price points. As long as you are happy with the price you paid and the yield on cost you’ll receive, then what else does a person need to do to feel satisfied with an investment?

Personally, I’m going to wait and see what will happen in the next few months. I’ve seen markets correct without warning before and since they are hovering at an all time high, there is bound to a be massive correction on the horizon. Perhaps one of the stocks on my watchlist will have a mini correction and I’ll just load up on it. If I’m wrong, then I’ll just have to adjust sights on higher entry points and lower yields.
What are your thoughts on the ever increasing market highs?

This article was written by The Loonie Bin. If you enjoyed this article, please consider subscribing to his feed.

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