News Analysis date published New: 
Wednesday, September 7, 2011 - 11:00
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Wednesday, September 7, 2011 - 11:00
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Wednesday, September 7, 2011 - 11:00

My "Secret" For Buying at Market Bottoms

Wednesday, September 07, 2011 11:00 AM

Aug. 9 marked the low point of our recent sell-off. During the trading day, the S&P 500 hit a low of 1,101. It represented a drop of 18% in a little more than two weeks.

On that same day, in the middle of the sell-off, I bought shares of SPDR Barclays Capital High Yield Bond Fund (NYSE: JNK) for my Daily Paycheck portfolio at $37.09 a share. JNK closed at $38.32 a share on Sept. 2.

I also purchased shares of the master-limited partnership (MLP) Suburban Propane Partners (NYSE: SPH) on the same day. It's already up 6%.

This begs the question -- do I have a secret for knowing when to buy while the market hits a bottom?

The answer is yes, I do. But it doesn't involve spending hours analyzing graphs or even taking an educated guess on when we'll see a low in the market. In fact, to buy at the market bottom, I really don't do anything at all.

You see, as chief strategist behind The Daily Paycheck, my ai is to create a portfolio that pays me a dividend every day. So far, so good. In July alone, the portfolio generated $1,412.08 in dividends.

But I don't simply cash these dividends and pocket them. Since I started the portfolio in 2009, I've continually reinvested all the dividends paid back into my holdings. Rather than receiving a dividend check, I'm buying more shares of that company's stock instead. This means my future dividend payments will be based on even more shares, giving me higher dividend payments in the future.

It also means I'm automatically buying shares as the dividends are paid. In up markets, I'm buying. In down markets, I'm buying. And even when the market hits its lows like we saw in early August... I'm buying more shares at bargain prices.

But automatically buying at market lows is just one part of the benefit of reinvesting dividends. Reinvesting also offers you the chance to grow your positions dramatically.

For example, in February 2010 I bought 200 shares of The Aberdeen Chile Fund (AMEX: CH) for The Daily Paycheck's $200,000 real-money portfolio. But thanks to dividend reinvestment and the fund's double-digit yield, I now own 242 shares of CH in the portfolio.

This is 20% more shares than I originally purchased just 18 months ago... and I bought them without having to invest another dollar of my own cash.

And remember, I'm earning dividends on all these extra shares, too. So in the last quarter, when the fund paid $0.52 per share to investors, I saw a quarterly dividend of more than $125 ($0.52 x 241 shares) instead of $104 ($0.52 x 200 shares) if I hadn't reinvested.

This may not sound like much of a difference, and in fact, reinvesting dividends isn't a "get-rich-quick" strategy. But over time, this difference adds up. At this pace, in just five years I will earn double the quarterly dividends I receive from CH, had I not reinvested.

Now I'm not fooling myself. Dividend reinvestment doesn't guarantee you will make money. Take a look at the banks -- they paid high yields for years. But even if you reinvested those dividends, you'd still be down following the financial crisis.

Action to Take --> If you've already done your research and invested in a solid company, then reinvesting your dividends can be one of the safest way to increase your returns. And I am confident that this technique can help you outperform in this tricky market.

[Note: To get started on your own high-yield Daily Paycheck portfolio, be sure to read my free course on the topic -- "59 Dividend Checks a Month." There, I'll tell you all about my Daily Paycheck strategy, and even give you several high-yield ideas to start your own daily income stream. Visit this link to read now.]

Amy Calistri does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.