Monthly Dividend Stocks, Defined
Monthly dividend stocks are a group of equity investments that trade like stocks and pay monthly dividends. These stocks provide a more regular payment and, in many cases, a superior payout to ordinary equity investments. These stocks aren't necessarily the best dividend stocks by sector, but they can be reliable payers and a cornerstone of an income investment portfolio.
Types of Dividend Stock Payouts
The most commonly encountered stock dividend payouts include the following:
- Regular dividends: These are regular dividends a company pays from its earnings. These can be paid annually, semi-annually, quarterly or monthly, depending on the business and the dividend plans. The company usually pays these dividends in cash.
- Special dividends: Sometimes, a company has extra cash or makes a windfall profit in a quarter or year. In these cases, the company may pay a special dividend on top of its regular dividend.
- Stock dividends: Sometimes, a company may reward shareholders by delivering a stock dividend. It can pay this with the company's shares in reserve or through a stock split. Each share splits into a predetermined number of new shares in a stock split.
- Preferred dividends: Preferred dividends are paid on preferred shares if the company issues preferred shares. Preferred shares have different rights than common stock, including a special privilege to dividend payments and assets upon liquidation. Preferred shares do not, however, have voting rights. In some ways, preferred shares and dividend payments are more akin to bonds than stock ownership.
How a Monthly Dividend Stock Works
Monthly dividend stocks work like regular dividend stocks, but investors should note a few differences. These are important to understand when searching for top dividend stocks and how to invest in them. The first and most apparent is that these stocks pay their dividend monthly instead of quarterly, primarily to attract buy-and-hold income investors such as retirees and institutional investors.
This is how it works:
- A company is in business and earns profits. It will pay dividends if it wants to distribute those profits to investors.
- To pay the dividend, the company must first declare it. The dividend declaration usually comes out quarterly and will tell the amount of distribution, the ex-dividend date and the record date. Companies that pay monthly dividends tend to declare three at once to cover the upcoming three-month period.
- The ex-dividend day is the first day investors can buy the stock and not receive the upcoming dividend. An investor that wants to receive the dividend must buy it by the close of trading on the day before the ex-dividend date.
- The date of record is the day the company officially records who is eligible for the dividend. This day is after the ex-dividend day, but it doesn't matter as long as you purchased before the ex-dividend day.
- The day of distribution is the day the company pays the dividend. The payments are made directly to each shareholder's account. It is that easy.
Any company could pay a monthly dividend if it wanted to, but most don't. In the case of regular corporate business, corporations are limited by the quarterly reporting cycle. They report quarterly and may not know how much profit they have available for distribution until after the quarterly reports end. However, other business structures have a more visible cash flow and can budget monthly dividends. These include REITs, BDCs and closed-end funds.
Real Estate Investment Trust (REIT)
REITs are real estate investment trusts. These companies invest in real estate and can apply many strategies, ranging from mortgage-backed securities to renting commercial property. When they choose taxation as a REIT, they agree to pay at least 90% of their taxable income as dividends. Their income is derived, in most cases, from regular monthly payments, either rent or mortgage. There is no correct number of dividend stocks to own, but consider having a diversified approach.
Business Development Company (BDC)
A BDC is a business development company and is a form of closed-end fund. These funds act like venture capitalists by investing in middle-market loans to small and medium-sized businesses. BDCs maintain a stricter standard than most lending operations.
They must lend business assistance to ensure the investments have as much chance for success as possible. BDCs tend to invest in debt and debt-related vehicles, providing holders with regular returns.
Closed-End Funds
Closed-end funds are like mutual funds. However, a mutual fund can issue unlimited units based on invested dollars, while a closed-end fund has limited shares. That limit allows them to trade on the open market like a stock, which a mutual fund can't do. Mutual funds are only bought or sold after market hours. Some, but not all, closed-end funds pay a monthly dividend. The ones that do tend to invest in debt-related securities and bonds.
Advantages of Monthly Dividend Stocks
There are many advantages to monthly dividend stocks. These are only a few of the most commonly cited reasons for owning monthly paying dividend stocks.
Frequency
Monthly dividend stocks pay three times as often as regular quarterly dividend stocks and 12 times more frequently than companies that pay annually. Retirees and regular investors may need or want to count on a steadier cash flow. For a retiree, budgeting and coping with life-altering events with a more regular cash flow is far easier.
Steady Returns
Monthly dividend stocks are advantageous because they can give steady returns in all markets, even down markets. Steady returns are good for the account's health and the account holders' psychology. Nothing is worse than watching an account dwindle in size during a down market.
Compounding
Compounding, or reinvesting dividends, is a pillar of investing. Monthly dividend stocks allow quicker compounding and more significant returns over time because they pay out more frequently.
High Yields
Monthly dividend-paying stocks tend to yield higher than the average S&P 500 company because they tend to be tax-advantaged investment vehicles that aim to generate income for average investors. For example, some monthly paying dividend stocks are REITs. Real estate is integral to any investment strategy but is not always accessible to average investors. REITs alleviate this problem by owning real estate in a trust and selling shares or units to investors. Investors are then able to benefit from capital appreciation and rents.
What is yield? It is the payment you can expect from an investment in percentage form.
What is a good dividend yield? One the company can sustain.
Example of a Monthly Dividend Stock Payout
Gladstone Commercial is an example of a monthly dividend stock. It is a REIT focused on office and commercial properties. It makes its money via monthly rent payments. It pays its dividend out of those payments, which are highly visible and easy to manage. This is part of why the company can make the regular monthly payment and sustain it.
Gladstone Commercial pays $1.20 in annual dividend payments. That is $1.20 over the entire year, not each month. The monthly payment is 10 cents, which, over 12 months, equals the $1.20 payout. This formula is distinctive from the dividend yield formula, which lays out the payout in percentage form.
Risks of Monthly Dividend Stocks
Monthly dividend stocks carry certain risks, including the following:
- Distribution cut: A dividend cut or suspension is one of the largest risks of a monthly dividend stock. It could happen at any time and would have a detrimental effect on the share prices.
- Payout volatility: Many monthly dividend stocks have a managed distribution plan (MDP), which limits how much pays out each month. In these cases, distributions may be limited by earnings, which could be higher or lower monthly.
- Tax liabilities: Many monthly dividend stocks are tax-sheltered investment vehicles, which means they get preferential tax treatment if they pay out all or most of their income as dividends. In this case, some dividends may be qualifying dividends for tax purposes and others may be treated as ordinary income.
- Payout ratios: The payout ratio in monthly dividend stocks tends to be high because they are often required to pay 90% or more taxable income. What is the dividend payout ratio? The earnings paid as dividends in percent form.
Consider Monthly Paying Dividends for Income
Monthly dividends are great for income because they tend to be higher-yielding assets and pay a regular monthly dividend. Income-oriented investors may find them attractive, specifically those who plan to live off the distributions.
The only caveat is that many companies that pay monthly dividends are REITs, BDCs and actively managed closed-end funds that may pay ordinary and qualifying dividends with different tax implications.
FAQs
Check out some answers to frequently asked questions about companies paying monthly dividends and what dividend stocks pay monthly.
Are monthly dividend stocks worth it?
Like all investments, monthly dividend stocks can be worth it, but it depends on your goal. Monthly dividend stocks can fit the bill if you want to generate large amounts of income.
What is the highest-paying monthly dividend stock?
One of the highest-paying monthly dividend stocks in 2023 is SL Green. SL Green is a REIT focused on office space in Manhattan. It was yielding nearly 9% in annual distributions.
How does a monthly dividend work?
Monthly dividend stocks work like other dividend stocks, except they pay monthly dividends. Typically, stocks pay dividends quarterly, but some investment vehicles pay monthly.