I am faced with a dilemma. I’m not sure how to invest the $3000 I received from my tax refund. Clearly, I’m going to be investing it in my dividend portfolio, but I’m at a loss as to how to invest that money. Should I invest it all at once in a lump sum, or engage in dollar cost averaging? Should I invest it in one stock or spread it amongst all the stocks? What strategy should I use to increase my dividend portfolio? Decisions, decisions.
Regardless of what I choose, the monthly contributions to my dividend portfolio will remain the same. This is about investing an extra $3000. Let’s discuss.
Lump Sum vs Dollar Cost Averaging
In the grand scheme of things, $3000 is not a lot of money. But, it’s much more money than I normally invest in during any given month. Now that I have that money available to me, I have to decide if I want to invest it in a lump sum or through dollar cost averaging.
For those who don’t know, I’ll try to explain dollar cost averaging. Remember, I’m not a financial advisor and can’t give financial advice. But, in general terms, dollar cost averaging is investing the same amount of money over a period of time such that you receive the average price of the stock. When the stock price is low, you’ll be able to purchase more shares. When the stock price is high, you purchase less shares. But, over time, you will get the average price of the stock.
Were I to invest the full $3000 in one stock, lets say Apple, then all of that money is subject to market risk at the same time. So, if the market drops 15%, then I risk losing 15% of my $3000 purchase. However, as a reminder to myself and others, a loss really isn’t a loss until the stock is sold. However, there’s no guarantee that the stock price will rise, so risk will always be there – no matter how you enter the market. Of course, the reverse is true. You get the full benefit of the market increase, but again, can only take advantage upon the sale of the stock.
Another option would be to use dollar cost average. I could invest $500 for 6 months or $1000 for 3 months, which would allow me to get the average price of the stock. The downside is that not all of my money would be invested in the stock market working for me. Because I am investing for the long term, the longer my shares are working making me more dividends, the higher my dividend growth income will become in the future.
One Stock vs. Several
This is another decision I have to make. Do I purchase one stock or several. To keep things simple, I’ve chosen to talk about two stocks that I’m interested in: Realty Income and AT&T.
Buy Realty Income?
I am seriously considering buying $3000 of Realty Income stock. In the long run, what I do with the $3000 won’t make much of a difference. I’m still investing $3000 whether I do it with one stock or amongst a combination of stocks. However, I like Realty Income because I receive monthly dividends. The problem is I only receive about $0.21 per share of Realty Income. So, for my shares in Realty Income to make a meaningful difference, I would need to earn a lot of shares.
Another problem with Realty Income is the valuation. The stock is trading at about $60, which is a bit pricey. I wish the stock was half of that price so that I could purchase twice as many shares. The name of the game in the accumulation stage is to build up shares. The more shares, the better. However, while $60 is kind of expensive, I do like the fact the yield is above 4%.
Buy AT&T?
If I was concerned that Realty Income was about $60, then perhaps I should choose to put the money in AT&T. Not only is the price of entry cheaper, at about $40, but the dividend is higher, at about 4.8%. The only downside to AT&T is that the dividends are paid on a quarterly basis. But, that’s the case with virtually every other stock, so I’m just grasping for straws at this point. If I did purchase AT&T, I would own about 75 shares purchased at about $40 rather than just 50 shares of Realty Income purchased at about $60.
Buy Both Realty Income And AT&T?
Investing doesn’t have to be an all or nothing approach. I could take $1500 and invest it in Realty Income. I could then take the remaining $1500 and invest that in AT&T. That way, I’m not putting all my eggs in one basket, so to speak. Perhaps this is the happy balance between these two competing stocks that I’m interested in.
Buy HCP, Inc. or Hormel Food Corporation?
Two other stocks I’m seriously considering are HCP and Hormel Food Corporation (HRL). HCP is a health care REIT that lost its Dividend Aristocrat status recently. Given the fact that I’m already invested in the health care sector, this may not be the wisest choice at the moment. However, at approximately $32 per share it’s tempting. The fact that HCP cut its dividend and is no longer an aristocrat may be enough of a reason to stay clear of the stock for right now. But, it might also be one of those situations where one should invest where others are faithful, so to speak.
HRL is also a strong consideration. Unlike HCP, it is a dividend aristocrat and the stock is only trading at about $34.50 per share. I’m not a fan of the 2% yield, but I do believe that this company has strong fundamentals that will keep it going for some time. I will likely eventually purchase HRL. The question though is whether now is the right time?
Buy All Stocks Evenly
Another option is to divide the $3000 evenly amongst all the stocks in my portfolio. Currently, I have 9 stocks in my portfolio. Therefore, I could spend about $333 in each stock. While this approach eliminates the dilemma of deciding which stock to purchase, it lacks a certain focus, which I think can be beneficial. For example, when getting out of debt, Dave Ramsey’s advice is to attack the smallest debt you have while paying the minimum on all the remaining debt. This somehow seems to work because you experience a “win” sooner, and you use that emotional boost to help keep you motivated to get on to the next debt. So, if you have 7 credit cards and you pay off one, you now have 6 credit cards and it feels like you’re making progress.
However, if you try to pay off all 7 credit cards at the same time, evenly, you will eventually get out of debt. However, it will take you much longer to do so and you won’t get those small wins along the way. This, of course, has the risk that you will lose interest and won’t stick with paying off debt.
Deciding how to invest in stocks, as I’ve laid out in this post, presents a similar analogy. Do I invest with a power of focus, or split the $3000 evenly amongst my stocks?
Investment Strategy?
Finally, what investment strategy should I choose to build my dividend portfolio?
A primary “initial” goal of mine is to earn enough dividends in each of my stocks so that the monthly or quarterly dividends pays enough for one stock (on a monthly basis). So, one option is to start with one of my favorite stocks, which is Realty Income.
Alternatively, I could initially try to own 100 shares of one stock before trying to get to 100 shares of another stock. Once I have 100 shares in each stock, I will then aim to get 150 shares, or 200 shares, etc. There’s no rhyme or reason for initially choosing 100 shares, other than it’s a nice round number and I can begin selling covered calls if I desire.
Conclusion
It can be difficult to decide how to invest $3000. How I choose to invest this money will not only impact this $3000, but all future ‘extra’ money I have available to invest. For example, in April, I will invest $3000. However, in the next couple of months, I will likely have available nearly 10 times that amount to invest. I will disclose how I choose to invest this money later, but let me know your thoughts. Based on the above, how would you invest $3000?
If trading commissions aren’t an issue I would buy more than one, especially if I wasn’t sure which I liked the most. It looks like most of your money is in Exxon at the moment so I’d try and add as many stocks as possible to add some diversification. Unless there was one stock that stood head and shoulders above the others and I thought it was a screaming buy, I’d split up the money. Just my .02
Thanks Captain.
Trading commissions are definitely not an issue. Adding additional stocks as possible to add some diversification is definitely on the agenda. I want to own 12 stocks maximum, for right now, in my Capital One Investing account to keep the $12 per month I pay in commissions in check. I currently have about six stocks in Capital One Investing. I could try to increase that number to twelve, but it would take me a while to choose an additional four stocks if I also included HCP and HRL. Decisions, decisions.
Not a bad dilemma to have though, having extra capital to invest with. Either way all of those companies are solid choices so you won’t be disappointed. As long as trade fees are not an issue, I say go with one or two that currently have the best value. Ideally for portfolio diversity if possible but the choice is yours. Looking forward to seeing what you decide.
Yea, I don’t think any of the choices I laid out are actually bad choices. It’s not like I’m not going to invest in the remaining stocks regardless of what I choose. I’ll be deciding in the next few days. It’s kind of frustrating even though it’s also exciting.
I don’t invest for dividends. Instead, I focus on capital gains. If I had extra cash lying around I’d probably wait a few months before investing it into UPRO (3x ETF for the S&P 500).
No problem Troy. That is a totally valid approach to investing in the stock market. I know myself though, and I’m not ready to pursue that strategy quite as yet, although I’ve been interested in it for a while. I do think I want to concentrate on income investing because I don’t want to be all over the place with my strategy. That being said, I want to get the benefit of both capital gains and dividend growth if possible. I may never invest in the next Google using this strategy, but there is something to be said about earning a constant stream of income passively. Either approach has merits.
DP –
I would leverage more than 1 if you have the $12/month option at CapitalOne. Look at CVS, as well, and even CISCO.
You can easily do $750 across 4 entites OR you can set it staggered based on valuation i.e. 30% to the best undervalued 25% for the next, 25% for the next and 20% for the 4th.
Ultimately up to you and buy what you understand : ) Something that has a moat and is here for the long-run! Also – whatever helps you sleep at night.
As stated earlier, GREAT problem to have.
-Lanny
That’s definitely a possibility: spreading $750 across 4 stocks. I was also thinking about doing it based on the cheapest stock, then the next cheapest, etc. I guess there’s no right or wrong way to do it. I never really gave CVS or CISCO much thought. Seriously thinking about adding HRL to the portfolio, but I’ll definitely consider those two as well.
Welcome to the Dividend Growth Community. Your blog looks fantastic. I wish I had the time to put this much effort into mine. My advice would be to be patient. Follow stocks and continue to collect information on them. My experience has been if I’m thinking about purchasing 8 stocks, I haven’t settled on the buy I want. I continue to research until I limit my choices to 2-3 stocks. As others have said if commissions aren’t an issue, I wouldn’t put all my eggs in one basket. I don’t think I’d dollar cost average the 3k. It sounds like you have a plenty more to invest going forward. I’d put that money to work. But I wouldn’t mind spending a little time watching these stocks and seeing if you can get in at a value you like.
DS
Thanks for the kind words. I am glad you like the look of the blog. I am so thankful I found a theme I found a theme I love. I still have improvements to make. I’m going to work on making sure that the picture in the featured image sections fits nicely into the squares. Little by little, I’m learning about blogging and different ways to improve the site. Clearly, I’m no expert. I also have a full-time job, so I do this in my spare time. Sometimes I have more times than others, but, more recently, I’ve been finding a little bit of time to either work on my blog, or visit other blogger’s website.
Patience is something I struggle with. I hate having idle cash around, for a number of different reasons, including the fact that I am prone to wasting money that I have readily available. If the money is invested, I am far less prone to sell shares to access that funds. But, if it’s just sitting in a savings account, I can easily withdraw funds I need. At the same time, I also don’t want to rush into buying stocks. I just have to find that delicate balance.
Thanks for the warm welcome to the DGI community.
I totally understand what you mean about spending 💰 not invested. I struggle with patience as well. One thing that has assisted me a little bit is moving the money from savings to my brokerage account.
Yea, I do that too. I actually have $200 sitting in my Capital One Investing brokerage account and it’s just sitting there. At some point I’m going to spend it on buying shares, but I’m trying to take care of this $3000 expenditure first before I worry about that $200. A lot of that has to do with where the money is, etc. Had that $200 been in my savings or checking account, I probably would have used it already buying something dumb.
I also feel like the valuations on T and O aren’t terrible, but are a little high right now. I’ve been following both, but haven’t added to either because I’m hoping to get in a little cheaper. That said you are about to invest a number near my entire DGI portfolio. So take whatever I say with a grain of salt.
It’s all good. I valuable your opinion notwithstanding the size of your portfolio. I totally wish they both were cheaper, although I can’t complain too much about T’s stock price.
Pingback: April Dividend Income Report - Dividend Portfolio
Pingback: How I Invested $3000 - Dividend Portfolio
Too bad that I didn´t see this post before. My nr 1 rule is that commesion can not be larger than 1%. That´s my main rule. Then I have small position = $1200, medium position = $2000 and large $3000 – $5000.
I like to buy my shares with a share-purchase-strategy. This is normally 30-30-40% strategy, meaning If I invest $2000, I buy for $600, $600 and then $800. This way I spread out my buys and just not put everything in one pocket.
That’s great advice Stockles. I’ll keep it in mind for future purchases. I’m well aware of the relationship between my commission costs and share purchases. I’m comfortable with that ratio now, but obviously hope to improve on that ratio for future purchases.
Thanks for the informative post. The way you narrated the post is good and understandable. After reading this post I learned some new things about investing. Please let me know for the upcoming post.
Rohit recently posted…What is Power of attorney (POA)
Glad you found it helpful Rohit.