Is Dollar-Cost Averaging for You?

Dollar-cost averaging can be a good way to protect yourself from a volatile market. It's the practice of accumulating shares in a stock over time, by investing a certain dollar amount regularly, through up and down periods.

For example, you might purchase $500 worth of Scruffy's Chicken Shack (Ticker: BUKBUK) stock every three months. You'd do this regardless of the stock price, buying 10 shares when the price is $50 (10 times $50 is $500), and eight shares when it's $60 (eight times $60 is $480).

The beauty of this system is that when the stock slumps, you're buying more, and when it's pricier, you're buying less. It's an especially good way to accumulate shares if your budget is limited. (Buying regularly through dividend reinvestment plans, or "Drips," is a form of dollar-cost averaging.) Don't drown in commission costs, though -- dollar-cost average only if you can keep commissions below 2%, or if you're buying through direct-purchase plans.

Also, if you're dollar-cost averaging by the book, you shouldn't be second-guessing the market, deciding to skip an installment because the stock is up or down. It's meant to be a methodical system.

Investing drip by drip
Take some time to learn more about "Drips" (direct investing plans, or dividend reinvestment plans). Read about the power of dividend growth and the power of Drip plans. Also, check out our Drip Investing discussion board.

Combining dollar-cost averaging with companies with high dividend yields, including companies like Altria (NYSE: MO  ) , Merck (NYSE: MRK  ) , and General Electric (NYSE: GE  ) , can be a powerful investment strategy. For more companies that may fit the bill, take a free test-drive of our Income Investor newsletter, which offers our most promising recommendations for high-income investments.

Longtime Fool contributor Selena Maranjian owns shares of General Electric. Merck is an Income Investor pick. The Fool has a disclosure policy.


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