Investors are always looking for new strategies to beat the market over time and build wealth to ensure their financial futures. Unfortunately, many investors get caught in overly complex investment strategies that end up losing them money over the long-term. One time-tested strategy that is both simple and extremely effective is the concept of dollar-cost averaging.
For buy-and-hold investors who understand the merits of slow-and-steady investing and the amazing power of compound interest, it’s entirely possible to build your financial future by dollar-cost averaging.
The beauty and simplicity of dollar-cost averaging
Dollar-cost averaging might seem like a complex investment strategy, but at its core, it’s very simple. Dollar-cost averaging means investing a given amount of money every month, regardless of what the market is doing.
One major benefit of the strategy is that it removes the dangerous temptation to time the market. Studies have statistically shown that those who try to predict the market’s direction, and frequently move money in and out of their portfolio, lose out over time. This is because of a variety of factors.
First, as much as we’d all like to think we can predict the future, none of us can. We are often simply wrong when we think that the market is about to make a big move up or down.
Secondly, frequently buying and selling stocks generates commissions that are paid to a broker. And, if the assets aren’t held in a tax-advantaged account, frequent trading generates taxable events that are paid according to a person’s short-term tax rate, which can be especially painful.
Stocks to make it worth your while
Stocks that pay dividends to shareholders are the best type of investments for the dollar-cost averaging strategy. These companies allow investors to build wealth slowly by pocketing those quarterly dividend payments. Investors can actually realize even greater rewards over time by reinvesting dividend payments, whereby you use a company’s dividend payment to buy more shares of the same stock.
Some of the market’s best dividend stocks are companies that we have all likely encountered at some point in our lives. For example, fast food juggernaut McDonald’s Corporation (NYSE:MCD) has been paying dividends for decades on end. Last year, McDonald’s Corporation (NYSE:MCD)’s returned $5.5 billion to shareholders in the form of dividends and share buybacks. The company increased its dividend 10%, and may do so again this fall. At current prices, the stock yields 3.20%.