Many investors go for dividend-paying securities because they generate passive income. While most companies make their payouts quarterly, some pay monthly dividends. But given a choice, should you choose monthly dividends over quarterly dividends?
Monthly dividends are better than quarterly dividends since they earn higher returns due to frequent compounding. Also, they provide a regular income, making budgeting easier. Their main drawback is that they could cause the firm to think short-term, adversely impacting your earnings.
Companies give out part of their profits to shareholders in the form of dividends. This article will provide you with detailed information on why monthly dividends are more beneficial than quarterly dividends.
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How Do Monthly Dividends Differ From Quarterly Dividends?
The primary difference between monthly and quarterly dividend payments is the schedule. A firm that pays dividends is at liberty to determine its own payment schedule. When a company pays out monthly dividends, its shareholders receive a payment twelve times per year.
Conversely, a company with a quarterly based dividend payment schedule pays out dividends four times per year.
You can determine a company’s financial health by looking at its dividend payments. A company that pays out consistent dividends to shareholders is appealing to investors since this shows it is financially sound.
To get a better idea of how monthly dividends differ from quarterly dividends, let us examine their pros and cons.
Monthly Dividend Pros and Cons
Monthly dividends come with certain pros and cons. Let’s examine the benefits of receiving monthly dividend payouts first.
Advantages of Monthly Dividends
Monthly Dividends Align Better With Living Expenses
Planning for your finances and managing bills is relatively straightforward when you have a monthly income because most bills, including rent, utility, and mortgage payments, typically run on monthly cycles.
Therefore, monthly dividend stocks make sense since they align better with your monthly living expenses, providing steady cash flow you can count on.
Additionally, having a regular income can make it easier for you to grow your savings, pay off debt, and plan for short and long-term financial goals. Besides, if you are in retirement, you can use the income to supplement your pension income or perhaps even fully sustain your current lifestyle.
Monthly Dividends Compound Faster
If you choose to reinvest your dividends every month, your initial investment will grow considerably.
Reinvesting enables you to buy additional shares, creating a higher dividend income. It also helps you avoid commission fees. What’s more, over time, the earnings compound at a much faster rate than quarterly dividends.
To illustrate this, $100,000 invested in XYZ stock with a 7% yield would grow to $801,918.34 in 30 years if compounded quarterly. However, the same amount would grow to $811,649.75 if monthly compounding occurred.
Next, we explore the cons of monthly dividends.
Disadvantages of Monthly Dividends
Monthly Dividends May Place the Company Under Pressure
Paying out a dividend every month can put a lot of pressure on a company. Not only does it have to carry out its standard operations, but it also has to plan for monthly cash flows. Eventually, this could lead to inefficiencies and low investor profits.
Monthly Dividends Might Have Tax Implications
Some securities that pay monthly dividends, such as ETFs or Master Limited Partnerships
(MLPS) come with special tax implications. Besides dividends, they also distribute capital gains that attract higher taxes, so as an investor in such securities, this might affect your overall returns.
Quarterly Dividends Pros and Cons
Quarterly dividends are advantageous because they tend to create more value for investors and can help a company operate more efficiently. Let’s take a look at these advantages and disadvantages now.
Advantages of Quarterly Dividends
They Help a Company Operate More Efficiently
Company executives might operate much more efficiently, leading to higher dividend payouts if a company pays quarterly dividends. This is because they have more time to work on creating profits for their shareholders.
Besides, they spend less time and money on monthly financial accounting and administrative costs.
They Might Create More Value for Investors
For companies with a high dividend yield and share price, quarterly dividends might generate better value for shareholders, as receiving a lump sum payment might predispose you to buy more shares. Furthermore, some companies offer qualified investors an advantaged dividend program which might include a discounted rate when reinvesting in shares.
Disadvantages of Quarterly Dividends
Quarterly Dividends Might Deliver Lower Earnings
Quarterly dividend payments are typically lump-sum amounts. But since you only receive the dividends four times a year, the infrequent payout opportunities might mean a lower overall return on your investment.
You Have To Learn To Budget Quarterly
If you receive quarterly dividends, you might have to base your budget on the quarterly earnings. However, mapping out an effective financial plan to cover four months might be somewhat challenging if your dividends form a major part of your income.
To mitigate this, you can create a monthly income from quarterly dividends by selecting securities with staggered quarterly dividend payment schedules. This means going for dividend stocks with payouts falling outside the typical payment months of March, June, September, and December.
By holding securities paying dividends across different months, you can build a consistent monthly income.
Types of Monthly Dividend Stocks
The most common types of securities or businesses that pay monthly dividends include:
- Closed-end funds: These are mutual funds with shares traded on the stock exchange. Fund managers actively manage the funds’ portfolio, investing in stocks, bonds, and other financial assets.
- Real Estate Investment Trusts (REITs): Equity REITs collect monthly rent payments from their tenants while mortgage REITs earn interest on real estate property mortgage loans. REITs must distribute at least 90% of their income in the form of dividends, with Equity REITs providing the highest potential for a steady income and capital appreciation.
- Business Development Companies (BDCs): These comprise companies that invest in the growth of small and medium-sized enterprises. Like REITs, they must pay out a minimum of 90% of their taxable income as dividends. Unfortunately, BDCs are rather risky and often feature high payout ratios, complex business models, dubious underlying investments, and considerable financial leverage.
- Master Limited Partnerships (MLPS): These are businesses that produce predictable income streams resulting from producing, processing, storing, and transporting depletable natural resources.
Tips to Earning High and Consistent Dividends
When building your investment portfolio, you might want to purchase stocks based on a valuation of their fundamentals rather than focusing solely on their dividend payout schedule.
Additionally, it’s essential to recognize that though monthly dividend stocks like mortgage REITs, BDCs, and closed-end funds might yield high dividends, they are also risky and volatile. Therefore, you need to approach them with caution.
Here are additional helpful tips to help you earn high and consistent dividends whatever your payout schedule:
- Choose safe, high-quality dividend-paying stocks or value stocks.
- Understand your risk tolerance and size your positions accordingly.
- Compare different dividend stocks to ensure you select those that fit your investment goals.
- For a regular monthly income, purchase stocks with staggered dividend payout schedules.
Which Option Should You Go For?
At the end of the day, the decision to choose monthly or quarterly dividends will depend on your investment objectives. If you want to establish a monthly cash flow, then monthly dividends are what you need.
However, if you prefer to grow your portfolio rather than create an income stream, quarterly dividends are more appropriate for your needs.
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Conclusion
A smart investor maximizes their investment’s potential. As such, you want to invest in securities that deliver the highest earnings, such as a healthy mix of growth and income stocks. Doing so can help you build a well-rounded portfolio that earns you a stable and regular monthly income. So, get started right away and leverage on the powerful effects of compounding.
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