Many finance professionals recommend adding to your investments every month. The purpose for this is simple – over many years it effectively 'averages out' and mitigates a wide variety of macroeconomic circumstances including employment levels, interest rates, foreign exchange rates, and more.
Yet if your regular monthly investments go into shares – and since you're reading this article I assume they do – it can be tough to come up with a new idea every month. The solution to that is simple: you could sign up to a share investment service (like The Motley Fool's Dividend Investor service) and get dividend shares hand-picked by an expert.
Shameless self-promotion aside, there are three main concerns for investors trying to regularly identify companies to buy:
Price
This is simple. At a low enough price, many companies are a reasonable opportunity, either because the business is significantly undervalued or because the dividend becomes a correspondingly large part of a weakened share price. G8 Education Ltd (ASX: GEM) shares were one such opportunity at around $3, and Telstra Corporation Ltd (ASX: TLS) is shaping up the same way right now.
The downside is that there are no guarantees you'll spot great bargains each and every month. Often it will be the same low-priced shares for several months in a row, sometimes looking decidedly unattractive.
Earnings
This is not simple. Throw a stone and you'll hit half a dozen earnings estimates for most companies in the market – each of them different. Sometimes you'll be able to spot companies where the impact on earnings is potentially not as severe as the market has been expecting.
Other times, you'll have to make a guess (educated or otherwise) about where earnings are heading. For example, will the increase in profitability caused by rising interest rates be sufficient to offset the reduced loan volumes and higher levels of default on the loans that Commonwealth Bank of Australia (ASX: CBA) will likely incur when rates go up?
Sometimes you will either be wrong in your earnings predictions or simply have no idea where earnings are headed – there's no guarantee you will spot a company with attractive, foreseeable earnings growth every month.
Moat
If you can't get a good price, nor predict the earnings, what you can do is look for a moat. A moat, like one surrounding a medieval castle, refers to the 'barrier' around a company's earnings that keeps the competition out, and it can take a number of different forms. Companies like Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL) have reasonable moats as a result of research expenditure and intellectual property. In simple terms, a moat is a product or service that the competition can't compete with either because of low costs, patent protection, high quality, or other reasons.
Companies with competitive advantages like this can generally earn better than average returns over the long term.
I'm no fan of the banks, but if you bought Australia's biggest one, Commonwealth Bank, at its pre-GFC peak (and stayed patient through the subsequent 60% decline), you would have doubled your money since then, before dividends. More than anything, patience is the key.
