How Averaging Down Can Improve Your Dividend Income

As a dividend investor we are for the main purpose income investors and should not be worried about the current price of the share price. A high share price gives you a good feeling but is not very helpful when it comes to buying more shares. A drop in the share price is bad for portfolio performance but gives you the opportunity for additional investments. Today I will show how averaging down can improve your dividend income and dividend yield.

What does averaging down mean?

Averaging down simple means that you buy more shares after big drop in the share price and if the share price is below the price the first investment. The goal of that strategy is more or less to improve the your the yield on costs. In the following examples I defined the following assumptions.

In the example above the share price at the beginning is on a very high level of 50 USD, but we wanted to buy this company because of moderate pay out ratio and because of its constant moderate dividend growth. Furthermore the outlook was quite positive and the financial situation of the company didn’t really change. Just the market volatility will be a little crazy in the upcoming years (this is assumption not a prediction).

Well after all you can easily see that we are buying stocks as soon as the current share price is below the average investment price by doing that we are able to improve the the Yield on Costs to 5.67% and will have a total performance of 15.15%, without dividends the performance would be at -13.14%. So you can see by averaging down our investment price it was possible to turn a negative overall performance in solid positive performance.

Of course the dividend growth is also a big factor in this example, without any dividend growth the yield on costs would be at 3.83% and total performance at 8.57%.