Sunday, July 12, 2015

Dividend Re-Investment Experiments Part 3 - Regular Investing vs Lump Sum Investing

Dividend Growth Stock Blog

In my previous articles of the dividend reinvestment experiment series, I discussed the importance the time component and dividends reinvestment. You can read more below:

Part 1:

The purpose of these experiments is to give me an idea of what to do under different market scenarios with different investment strategies and approaches. I am not trying to model real life - which is impossible in my mind.

Regular Investment vs Lump Sum Investment

For the next experiment, I wanted to see the effect of regular investment intervals. Also, I wanted to compare what happens with just adding the lump at the beginning.

For this experiment, I reused the ‘market modeling’ scheme in the 2nd article and I added a yearly investment interval.

Initial Price
Share #
short price variance
short price cycle
long price variance
long price cycle
div growth
Yearly Investment

Instead of focusing on one company (experiment 1 & 2), I added 7 companies to see the effects of diversification. By changing the long and short cycles, I can alter the cyclical nature of the company. For now, the companies follow the market (i.e. beta=1).
As mentioned above, there are 7 companies (A-G) each with different cycles, growth patterns, dividends etc. I've set the initial price to be 100 for each company for the simplicity of the charts. The yearly investment is $1,000. After 20 years, the cost is $140,000 (20 years x $1,000 x 7 companies). In the case of lump sum, the initial investment is $20,000 at the beginning.

I also modeled the wide market by adding a 30% dip in year 6-7 with recovery from 8-10, and then another dip in year 14 with recovery in 15-16. Obviously, real life is not like this, but I wanted to see the impacts of dips etc.


The Google Sheets spreadsheets are provided here for you to play with:

Regular investment

Lump Sum

I think you to copy the spreadsheets to your own google docs account for you to modify them.
Regular Investment intervals

The total valuation is similar to the findings in experiment 1&2. There will be down years where we can see up to 50% loss in total valuation. After the 10 years, the investments become robust such that the total valuation can absorb market downturns.
With regular investments, our totals would be just over $300,000 with $140,000 investment.
The dividend income trend follows what we found out before. It grows constantly every year. This (again) shows that the dividends income is the key metric that I need to focus on. The market can go up and down - the only constant is dividends income.

With regular investing, the total is around $16,000 - which is close to 10% yield on cost.

Lump-Sum Investment

Now, if you have $140,000 to invest at the beginning, then what would be the outcome? In a way, we visited this before in the second article.
We suffer similar percentages of losses in the down years. After 10 years, the investment become ‘robust’ against market downturns.

The biggest difference is that the valuation is over $400,000. Basically, the compounding effect of a larger lump sum will give you better gains after 20 years.
For the dividends, the compounding effect is also apparent. We are getting close to $20,000 per year, which is around 14% Yield on Cost.


It is important to find quality companies that can continue to grow and provide a constant and growing dividends.

If you can do this, then:

  • Both Lump Sum and Regular Investment Intervals method work with dividend growth investment. The key is time (and patience).
  • If you focus on valuation then large (unrealized) losses are possible. Note to self: Need to continue investing and not look at valuation.
  • Dividends Income grows year over year. Note to self: This is the metric to consider.
  • If you have the money, Lump Sum investment outperforms regular investment intervals over time. Note to self: Save more and invest more.
  • Diversification over several companies can smooth out the randomness of gains and losses from individual companies. Note to self: Diversify!

Note: In real life, things are very different. However, the experiments are useful for me to prepare myself and focus on the important things.


That's it for now. Please let me know what you think of regular investing vs lump sum investing.


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