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Monthly Dividend Stocks

Monthly dividend stocks appeal to income investors for several reasons. Stocks that pay dividends monthly provide more predictable income and make it easier to budget, especially for those living off dividends in retirement.

You can download a complete up-to-date list of stocks that pay monthly dividends by clicking here

Most companies pay dividends on a quarterly schedule, which can result in a lumpier income stream. Monthly dividend stocks better match income with monthly expenses such as mortgage and utility payments to make budgeting easier.

Monthly dividend-paying stocks come with another potential benefit as well – faster compounding. Simply put, the more often we receive dividends, the faster we can reinvest to buy more shares and generate even more dividend income.

Stocks that pay monthly dividends allow us to potentially increase the number of shares we own at a faster pace than a company paying quarterly dividends, helping dividend income compound at a faster rate.

However, remaining focused on owning high quality dividend stocks with safe, growing dividends and reasonable valuations is most important, regardless of a company’s payout schedule.

Different Types of Monthly Dividend Stocks

Hundreds of companies and funds pay dividends monthly. Despite the large number of monthly dividend stocks, most of these companies fall into just a handful of industries.

Many of the businesses that pay monthly dividends are closed-end funds. A closed-end fund is a type of mutual fund whose shares are traded on a stock exchange. Its assets are actively managed by the fund’s portfolio managers, and these funds can be invested in stocks, bonds, and other securities.

Conservative income investors are best off avoiding most closed-end funds due to several of the unique risks they possess (e.g. financial leverage).

By hand-picking high quality dividend stocks instead, investors can design a portfolio that meets their unique income needs and risk tolerance while also avoiding the hefty management fees charged by mutual fund companies.

Outside of closed-end funds, a common type of stock paying monthly dividends is a real estate investment trust (REIT). REITs are popular monthly dividend payers because they typically collect rent payments from their tenants on a monthly basis and are required to pay out at least 90% of their taxable income as dividends.

By distributing their income monthly, REITs can more easily manage the tax complexities of their businesses. However, it’s very important to note a major distinction between the two primary types of monthly dividend-paying REITs – equity REITs and mortgage REITs.

Equity REITs own properties such as malls, apartments, and office buildings that are leased out to tenants who pay them rent. There are many different types of equity REITs, and they can be solid investments to consider.

On the other hand, mortgage REITs deal with property mortgages and typically do not own any physical properties. They loan money for mortgages to the owners of real estate properties and can also purchase existing mortgages.

Mortgage REITs make money by earning interest on the residential and commercial mortgage loans they make. The mortgages they issue or purchase pay them a higher interest rate than what they pay to borrow money at short-term interest rates.

Mortgage REITs typically use significant financial leverage to magnify their returns and often have very high dividend yields.

For these reasons, mortgage REITs are especially sensitive to interest rates, which impact their net interest margin. Interest rate volatility can significantly affect their investment income any given quarter, creating more potential for dividend cuts. 

A third group of monthly dividend stocks to be aware of is business development companies (BDCs). BDCs are investment companies that primarily invest in small and medium-sized businesses. 

BDCs typically maintain a pass-through tax structure like REITs and must distribute at least 90% of their taxable income in the form of dividends.

Despite their typical investment diversification across many different companies, BDCs have above-average risk characteristics, even for monthly dividend stocks. It’s hard to get comfortable with their high payout ratios, financial leverage, murky underlying investments, and challenging accounting.

Building a Monthly Dividend Income Stream the Hard Way

By now, it’s probably obvious that our risk aversion makes us uncomfortable investing in most of the monthly dividend stocks available.

What can we do if we still want the predictability of a monthly income stream from dividend stocks?

We can still create a portfolio that delivers reasonably consistent monthly income by owning high quality dividend stocks with quarterly payment schedules.

The way we can do this is by owning companies with complementary payout schedules and similar dividend yields.

For example, suppose you wanted to hold 30 stocks in your portfolio and receive more consistent dividend income each month.

You would need to find 10 companies with similar yields in each of the three possible quarterly payment groups below:

  • January / April / July / October
  • February / May / August / November
  • March / June / September / December

While the monthly income generated will still have some lumps due to the different dividend yields and dividend growth rates of these companies, it would be much smoother than buying dividend stocks randomly.

In theory, the quality of this portfolio’s income safety and income growth should also be higher given its greater number of investment options and ability to avoid some of the risks faced by traditional monthly dividend stocks.

Our Portfolio tool was designed specifically to help investors stay on top of their income schedule. You can see exactly how much dividend income you are set to be paid each month of the year, making it easy to identify preferable payout months as you continue hunting for income ideas.

Closing Thoughts on Monthly Dividend Stocks

Monthly dividend stocks offer the temptation of high dividend yields and more frequent dividend payments. However, income investors need to be very cautious with their consideration of investment opportunities in this space.

In our opinion, most (but not all) monthly dividend-paying stocks possess meaningful risk factors that are usually dormant but always present…and could rear their ugly heads at any time.

High payout ratios, significant financial leverage, complex business models, a dependence on capital markets, and sensitivity to interest rates combine to create a cocktail that’s powerful enough to quickly stun any investor with little forewarning.

Stocks should be purchased based on their business quality and valuation, not their dividend payout schedule.

However, if we had to build a portfolio with smoother monthly income patterns, our preference is to create our own monthly dividend portfolio by buying groups of stocks with complementary payout schedules and similar enough dividend yields.

This approach certainly takes more time and thought, but it opens up investment opportunities across a much larger number of high quality dividend stocks that offer safe current income and reliable income growth.

For conservative income investors who are adamant about buying monthly dividend stocks, equity REITs with relatively low financial leverage offer arguably the best potential for stable income and long-term capital appreciation.

Many mortgage REITs, BDCs, closed-end funds, and other monthly dividend stocks are more volatile and speculative high-yield plays that should be approached with caution, if at all. Many of them might not appear risky until it’s too late.

For investors desiring to own stocks with monthly dividends, please remain aware of your risk tolerance and size your positions appropriately.

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