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“Timing the market” with dividend stocks

Passive incomeThere are two types of investors. One type chooses an easy way of investing, the second type is more adventurous. Both approaches are legit and investors choose them according to their style, personality and time they are willing to dedicate to their portfolio.
 
 
 

Passive approach

The first type of investors contribute to their account regularly and invest on a regular basis without checking where their stocks are and what the stocks are doing. They cost average their investments. When the stocks are higher, they purchase less shares and when the stocks are lower they purchase more shares.

It is a similar approach to most investors do in their 401k accounts.

And it is a valid approach if you do not have time or do not want to commit more time to watch your stocks. It is also the most passive approach of investing on your own into individual stocks. It goes very well with dividend growth stocks as they also provide you with a bare bone passive income. What an excellent strategy it is! You have a passive investing style generating you a passive income. You do not have to move a finger to collect income in form of dividends and you do not have to move a finger to contribute new cash to your account (assuming you set up an automatic money transfer from your checking account to your broker account).

And add to it DRIPping and you have an ultimate money machine!

Timing the stock

The second approach generates a passive income too, but its creation is not as passive as the first type. It is for investors who choose to be adventurous, have enough time to dedicate to their portfolio and actually like it and want to be as active as possible.

I belong to this category of investors as I love to watch my stocks and positions on daily basis and I like to time the market.

Did I say time the market? Yes, I did. Many investors and passive investors will tell you that timing the market is suckers game. Hello Suckers! It doesn’t have to be, if you do it the proper way.

So how do you time the market so you do not lose money?

I actually do not time the market, but time the stock itself. And as a dividend investor I do not time it the way most people out there understand it. I do not time the stock to buy low and sell high.

I time the stock to get the best entry price possible.

Recently on Seeking Alpha I read a post about Realty Income (O). A few investors or contributors posted their comment that they are actively trading this stock. They buy it when it corrects to its 30ies, and short it when it hits a 45-ish level and some posted that this is a sucker’s game.

And that made me think that I actually have a similar approach. But there are differences to it. As a dividend investor, I never sell my dividend stocks (except there is a reason for it such as a dividend cut).Timing the market

But I time the stock, when I want to buy it. I contribute money into my account and wait for the stock to go down in price. If all my stocks are growing I do nothing and raise the cash. Once a stock (any of the dividend stocks I watch) starts falling I check first why (dividend cut or a market frenzy?) and if it is due to overreaction or any short term nonsense, I start watching such stock closely. When it falls well enough I place a trailing limit order, or contingency order which trails the price of the stock down.

As long as the stock falls, the trailing order trails the price down. As soon as the stock reverses and it hits the trigger price it activates a limit order. Once the limit is met, I buy the stock.

So, I time the market this way. I get the best price ever, although it is not a 100% sure thing. Sometimes the stock reverses hit my limit, an order gets executed, and then the stock turns back down and continues in its downfall.

If that happens I have a second set of cash ready for more shares to buy (that’s why I never use everything I have in my account, but try to split the cash in three thirds and use the thirds only.

When the markets and stocks I bought this way start rising and continue rising, I just sit tight contribute more cash, and collect dividends.

Which approach do you personally favor?

Image courtesy of photostock / FreeDigitalPhotos.net
Image courtesy of bplanet / FreeDigitalPhotos.net

 
 





12 Responses to ““Timing the market” with dividend stocks”

  1. Evan says:

    Loved the post! I do something similar. After eliminating dividend champions pursuant to certain metrics I am left with a 15 to 20 watchlist. I take the watchlist and time my purchase of one or two equities through the month based on the 52 week low. I figure that a company with 20+ years of dividend increases, a P/E of less than 20, operating margin above the industry average, and a book value under 4 (or in line with the industry) will eventually hit the 52 week high in the short term and in the long term grow.

    • Martin says:

      Evan, I think you are correct. And I love it too hunting those lows. I believe it is not any risky gambling and spending time doing it will reward you greatly as you can squeeze more cash out of those stocks than just blindly buying. I know that it might potentially average your price down to a certain point, but if you constantly strive buying lows, your average will be even better.

      Thanks for stopping by.

  2. Hey, I am with you on timing the market! I love sales and I believe that buying good stocks at sale price can be same as finding a good sale at the regular store. :)
    Nice blog!

    • Martin says:

      Hey HH&WG, thanks for stopping by!
      You are exactly right, I love the same when seeing stocks on sale then I go out hunting. Thanks!

  3. Robert says:

    Glad to have found your site. I too am looking to generate income by investing in dividend stocks and weekly options. I have some cash sitting on the sidelines now because the market is overvalued. I am waiting for a pullback before I invest it.

    • Martin says:

      Robert,
      I am still invested although I am raising cash. As far as dividend investing I keep holding and collecting the dividends, but not buying new stocks as I too consider them overvalued, so i am waiting for a pullback too. As far as options I try to be fully invested and if a pullback happens i will roll it down (unless the pullback is dramatic, violent, and too fast, then I will be in trouble).

      Good luck in your investing! And thanks for stopping by.

  4. CI says:

    Martin,

    My buddy makes a living as a day trader so I know timing the market is possible. It can be done. Unfortunately I don’t have a knack for it, plus it doesn’t really suit my personality.

    CI

    • Martin says:

      CI, I understand. I had a friend too who was trading commodities and he also was very successful timing the market. I tried myself, but as you I didn’t have my brain cells ready for this. Whenever I thought I was in tune with the market I lost money by misjudging it. So it is possible, but not for everybody. It’s same as with other trading. Some people cannot invest to individual stocks, some cannot invest into options and so on. It really depends on each individual investor what works the best for him/her.
      Thanks for stopping by.

  5. Nice post, HS.

    Timing the stock and going with the momentum can be rewarding. I dont employ this strategy as much as I would like to, but Ive dabbled with it a bit in the past. I lost some money a couple of years ago when I tried it without enough research and simply taking a wild guess. But eventually learned that I could make some money if I paid close attention to it…last year I managed to end up in the black with my few options trades.

    regards

    R2R

    • Martin says:

      R2R,
      thanks for stopping by. At first I also wasn’t much successful timing the stock (not the whole market), but later tracking the price down system helped me a lot. Thanks to that I could pick up many stocks for a lot cheaper price than by just blindly buying whenever I got some cash ready.
      Good luck!

  6. DivHut says:

    Love your blog posts. They get me thinking. I am a little of both I guess you could say. Over the years I have taken a very passive approach to investing putting money in month after month and dollar averaging. Recently though, as prices and PE’s have become so high I began ti “time” certain purchases and not simple make “blind” monthly investments rather I looked for a major decline in a particular stock and then made a purchase. I think most people are a little of both.

    • Martin says:

      DivHut,
      Thanks a lot for your support! You can try more active approach if you have time and you are a bit “playful” about investing. I like it a lot, so i can’t imagine having a very passive approach only. I just must have some excitement and adrenalin, and when stocks are moving down, it is the right time for me to jump in and have it a s a game, like “who gets the best price competition.” The trailing approach is quite simple. You take the daily price spread (between day low and day high), divide it in two, increase the result by 10% and add it to the day close. That will be your next day trigger price. For example, the stock XYZ has $30 day low, $34 day high and closed at $33. You take the difference between day low and day high (34 – 30) and split it in two = $2, increase it by 10% = $2.2 and add this to the close price ($33 + $2.2 = $35.2). Your next day trigger price is $35.2 a share. If the stock continues down, you move the trigger price with it (similar to a stop loss). if the stock reverses and hits this price, your limit order (I usually use the same price, thus $35.2) meaning if the price is below the limit I buy, if the stock jumps too high, it will activate the limit order but the order will not execute and I will wait for a drop. If the stock continues high without drops, I check it out if I want to chase it or keep waiting. Works great for me.



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