Like many things in personal finance, how and when to purchase a stock has many variables but is very important. Today, we’ll show how I bought Nestle and Johnson & Johnson using two different approaches. Of course, the best way to purchase these two stocks is to combine both approaches:
- Dollar Cost Average (DCA) is a great way to build a position over time. Buy in big chunks or little chunks but just build a position over time is the key point. With transaction costs at many brokerages set to $0, it no longer matters how many shares you can buy. Whether it’s 1 share per purchase or 1,000, the transaction costs should be zero.
- Creating an immediate large position (say over $10,000) in a single purchase or within the span of a few days is also preferred if you have the right company at a discounted price. This approach is best served with the highest quality companies during significant market or stock downturn. These companies rarely go on sale it’s a rare time to quickly build some decent position quickly.
These two approaches are best used when only buying the highest quality of stocks. There’s a reason I chose to use Johnson & Johnson and Nestle as examples. These are the two highest quality business you can own. Johnson & Johnson is one of only two AAA credit rated companies that has grown it’s dividend over 60+ years. And Nestle is the only one non-U.S. stock that I consider a must own. There’s a reason these two stocks are in my Top 5 hold forever core stocks.
Johnson & Johnson – Dollar Cost Average (DCA)
There aren’t many stocks that I feel comfortable using a DCA approach but Johnson & Johnson is one of them. Over the course of two years, I’ve purchases Johnson & Johnson (JNJ) a total of 7 times with amounts ranging between $1,400 – $3,300. Using this approach, I’ve spent a total of about $15,600 to buy 100 shares for an average cost per share of $156. As of today, these 100 shares have become 102.928 shares using dividend reinvestment (DRIP) and it’s valued at $18,763 for a total return of 20%.
For a stock like JNJ, I will DCA anytime I have available cash and I thought the stock was at fair value or cheaper. I love this approach because there are times I don’t have much cash available so I must buy 10 shares or 20 shares of JNJ.
Since I use Vanguard for my taxable account, I’m not able to purchase fractional shares. This means I must but at least 1 share but not 1.25 shares. This isn’t a problem with JNJ but when you are buying a stock like Alphabet (GOOGL) for $2,200 per share you might have to save up a little cash before buying even 1 share.
If you use this DCA approach to purchase smaller share amounts over time, it’s absolutely critical that you pay no (or very minimal) commissions on the transaction. Let’s explain this using two examples:
- Example One: 10 shares x $145 per share = $1,450 with $0 commissions.
- Cost = 0.00%
- Example Two: 10 shares x $145 per share = $1,450 + $7 transaction fee.
- Cost = 0.48%
Over several years, these costs will add up and lower your total returns. Vanguard used to have a $7 transaction fee so I had to make sure my purchases were larger. Instead of buying 10 shares like I do today, I would have bought 50, 75 or 100 shares. Vanguard reducing their transaction fee to $0 allowed me to DCA using smaller amounts and that’s helped me build my position in Johnson & Johnson.
If you are paying commissions today or the business model changes in the future for the brokerage firms, I wouldn’t pay more than 0.10% costs per transactions. This means, if you are charged $5 for a transaction fee then you should be buying at least $5,000 of a stock in a single purchase. Keeping these costs down are important.
That said, someday I’ll purchase more JNJ using the approach I used to buy Nestle.
Nestle – Build A Position NOW!
Owning a position in Nestle has always been a goal. In my Master Stock List, they are considered in my Top 5. But like all high quality stocks, it was always priced at a premium. But finally, after the first half of 2022 was clobbering stocks, it went from $141 per share to $107.
Like a rattlesnake, it was time to strike and buy the stock. But rather than wait to own a decent sized position over 2-years, I needed to get some now. Since it was down over 20% from it’s high, it took me only a week to buy 115 shares from prices between $107-$112 per share (average of $110). Within a week, I owned $12,700 worth of Nestle. It’s the fasted time I’ve every used to get into a new position over $10,000.
If the stock stays in these ranges than I buy small amounts ($1,500-$3,000) just like I’ve done with Johnson & Johnson. As a Top 5 company (in my Master Stock List), the best use of a market downturn is to focus on those stocks that you want to be the core of your portfolio. For me, those five stocks that will eventually be the core of my portfolio are:
- Coca-Cola (KO)
- Johnson & Johnson (JNJ)
- Nestle (NSRGY)
- PepsiCo (PEP)
- Procter & Gamble (which I don’t own yet)
And just like Nestle, I used this recent market downturn to buy my first shares of PepsiCo too. If I had more cash available, I would have built an initial starter position over $10,000 (just like Nestle) because these Top 5 stocks will eventually be valued at over $50,000 each.
Summary
These two approaches are best used for buying high quality stocks. Predictable earnings, “A” rated or better credit, repeatable business models on items that people will always need/use, and growing and safe dividends.
When Nestle dropped nearly 25% from it’s recent high, that is a no-brainer purchase for the buy and hold forever stock. In my case, I had enough cash to buy over $12,500 of the stock within a week. And I’d have no issue buying Nestle in small purchases too as long as it was priced at fair value or better.
Johnson and Johnson is one of the few stocks that I’d put $1,000 every single month. If the stock was just priced way too high then I don’t buy one month and I buy $2,000 of the stock the next month. When the stock drops during a market downturn or some headline drops the price then I’d buy over $10,000 in a single purchase.
This is how you build wealth. Quality matters. Value matters. Dividends matter too.
Thanks for reading!
Mr. TLR