Most companies that pay dividends do so on a quarterly basis. Others pay semi-annually or annually.
For those investors that require a monthly income for budgeting purpose, this would seem to rule dividend stocks out of the list of options for creating income, leaving the poorer rates of cash savings accounts, certain fixed income products, and other mutual funds. This selection of products can be problematic for various reasons: cash savings offer poor rates, fixed income products give no potential for increasing income or wealth, and mutual funds give little flexibility or control over investments.
The good news is, although much more difficult to find than quarterly paying dividend stocks, some stocks pay monthly dividends.
How monthly dividend stocks work
Most of these stocks invest in income producing stocks, bonds, and property companies. Many are investment trusts, and all trade on the stock exchange just like any other publicly quoted company. That means that shares can be bought and sold cheaply and quickly, and are not subject to other costs that, perhaps, would be incurred by investment into mutual funds.
Most of the monthly dividend stocks operate in the real estate, or energy and utility sectors, and invest in income producing assets. Income is generated from a mix of capital growth, corporate profits, interest on bonds, and income from rental property. Investments, and income, can be from a diverse portfolio of assets.
Benefits of monthly dividend stocks
Obviously, for budgeting purposes a monthly income makes sense. Most bills are collected monthly, and a regular stream of income makes this process easier to manage. For pensioners, a move from the normality of a regular monthly paycheck to a quarterly or half yearly income payment can be particularly traumatic. Cash flow is just as important to the individual as it is to multi-billion dollar company.
For those not wanting to take income, and looking for a longer term strategy of dividend reinvestment, a monthly payment of dividends also makes sense. Consider stock A that pays a dividend of 5% annually. The investor has to wait for twelve months before the dividend is available to reinvest.
The investor in stock B, that pays its 5% dividend in equal proportions each month, will be able to reinvest those dividends earlier. This means that the compounding process from which dividend re-investors benefit is started earlier, and wealth creation benefits.
The disadvantage of investing in monthly dividend stocks
Monthly dividend paying stocks are few and far between when compared to quarterly payers. This limits the number of companies available to invest in. This limitation means that there are fewer quality stocks from which to choose for monthly income seekers. By their very nature, monthly dividend payment stocks can suffer from fluctuating income streams, which may mean the amount of the dividend also fluctuates. Monthly income is great, but it may be that the lack of stability in income creates problems of its own.
Selecting monthly dividend stocks
As with any investment, it is important to conduct full research into the companies into which you are considering making an investment. There are steps you can follow to narrow down your search:
- Search on Google for monthly dividend stocks. A good list of monthly dividend stocks can be downloaded from here to an excel spreadsheet which will help to order the stocks by selection criteria;
- Look for dividend yield, but then research the company’s dividend paying history. A long history of high and increasing dividend payments can be an indication of the board’s willingness to continue with such a policy;
- Consider the fundamentals of the company: does it have good cash flow, and benefit from low levels of debt, for example. What are the prospects for the business and the sector in which it operates? How stable is the company’s management?
- Just as with any investment portfolio, consider diversification. The energy sector may offer the best dividend yield, but if the sector suffers an unexpected shock and share values fall, or profits are restricted by new laws or safety regulations, for example, then not only could your portfolio value suffer but also your income stream;
- If you don’t need the income, then consider reinvesting dividends to benefit from compounding growth and future dividend payments
To sum up
For those investors who desire a monthly income with the flexibility of investment choice, and the potential for better returns than achievable from a savings account, then investing into stocks that pay their dividends monthly could be the answer.
Proper research should be conducted into any stock before an investment is made, and this should include consideration of business, industry sector, and dividend payment history. Within your portfolio, it would be wise to ensure appropriate levels of diversification.
The dividends paid can be erratic because of business conditions and income stream, but these dividends can be reinvested as they are paid by those investors that want to compound their capital growth and look toward income in the future.
An alternative strategy for those investors that want to receive a monthly income would be to invest in a range of quarterly paying dividend stocks, with different payment cycles to build up a monthly income stream.
Before I go, I just need to give a special thanks to Daniel at Sweating the big stuff for hosting the Carnival of Personal Finance #388.