Many investors seek out dividend-paying stocks as a way to build wealth. Rather than rely on just share price appreciation as a way to make money in the stock market, these investors seek regular dividend payments to grow their portfolios.
While most companies that pay dividends do so every quarter, many companies make monthly dividend payments. Getting these payments on a faster recurring schedule can appeal to many investors, especially those relying on dividends for a steady income stream. But before you jump up to buy popular monthly dividend stocks, you should know more about monthly dividends and the companies that pay them.
How Does Dividend Investing Work?
A dividend is a portion of a company’s earnings that is paid to its shareholders, as approved by the board of directors. Companies usually pay dividends quarterly, but they may also be distributed annually or monthly.
Most dividends are cash payments made on a per-share basis. For example, if the company pays a dividend of 30 cents per share, an investor with 100 shares of stock would receive $30.
Some investors may utilize dividend-paying stocks as part of an income investing strategy. These investors, many of whom are older and retired, rely on the regular payment of dividends to make up for the loss of regular labor income.
Younger investors may also use a dividend investing strategy to generate income, perhaps to help pay the bills or to save for a big vacation. But those who don’t need the income may choose to reinvest the money with the idea of boosting portfolio growth. Through dividend reinvestment plans (DRIPs), investors can reinvest the dividend payouts to buy more shares. And the more shares they own, the larger their future dividends could be.
Regardless of the purpose behind dividend investing, it’s usually a slow and steady process where investors benefit from regular income or compounding returns rather than expecting a stock’s price to skyrocket.
How to Invest in Monthly Dividend Stocks
As mentioned above, companies usually pay dividends quarterly. However, several companies pay dividends monthly.
Stocks that pay dividends monthly may appeal to investors who want reliable monthly income, which may help with paying bills like mortgage and utility payments. Additionally, monthly dividend stocks may help investors who reinvest the payments realize faster compounding benefits.
To invest in monthly dividend stocks, investors may look at companies in specific industries that tend to offer regular dividend payouts, including monthly payments. These companies usually have regular cash flow to sustain consistent dividend payments.
For example, real estate investment trusts (REITs) pay out regular dividends because they receive steady cash flow through rent payments. These companies are legally required to pay at least 90% of their income to shareholders through dividends. And some REITs will pay dividends monthly.
Energy and utility companies are other industries that pay regular and relatively high dividends, including some monthly dividends.
Additionally, investors may look to exchange-traded funds (ETFs) or mutual funds that offer monthly dividend payouts. These funds will invest in various dividend-paying stocks – not just companies that pay monthly dividends – and distribute dividends every month.
Examples of Monthly Dividend Stocks
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Popular Monthly Dividend Stocks (Based on Market Capitalization) |
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|---|---|---|---|---|
| Company | Ticker | Industry | Market Cap (in billions)* | Dividend Yield* |
| Realty Income Corp | O | REIT | $41.5 | 4.21% |
| Pembina Pipeline Corporation | PBA | Energy | $26.1 | 5.49% |
| Shaw Communications | SJR | Telecommunications | $17.0 | 3.58% |
| AGNC Investment Corp | AGNC | REIT | $6.2 | 13.07% |
| Agree Realty Corp | ADC | REIT | $6.1 | 3.90% |
| *as of Aug. 31, 2022 | ||||
Determining the Highest Dividend Stocks
Not all stocks that pay monthly dividends are created equal. Investors may seek stocks that pay out the highest dividends, but high dividends alone don’t mean that the stocks are wise investments.
Investors should also remember that dividends aren’t guaranteed; a company can skip or stop making payments at any time. This adds to the risk of investing in dividend stocks.
Investors may want to analyze several criteria to determine the dividend stocks ideal for a wealth-building strategy. Here are a few things investors can consider when looking for the highest dividend stocks:
Dividend Yield
Investors often analyze a stock’s dividend yield to determine if it’s a suitable investment. This metric shows how much an investor would earn from an investment based solely on dividend payouts.
Dividend yield is expressed as a percentage, representing a stock’s annual dividend payments per share divided by the stock’s current price.
Dividend yield (%) = annual dividend payout per share / stock price
Stocks that offer the highest dividend yields may appear to be the most promising; after all, it seems that a high dividend yield will result in the most generous dividend payouts. But companies with high dividend yields may be risky, especially for investors interested in the stability of dividend investing.
A stock’s dividend yield could be high because the share price is falling, which can be a sign that a company is struggling. Or, a high dividend yield may indicate that a company is paying out an unsustainably high dividend.
Investors will often compare a stock’s dividend yield to comparable companies in the same industry to determine whether a yield is attractive.
Dividend Payout Ratio
Investors will also factor in a stock’s dividend payout ratio when making investment decisions. This ratio expresses the percentage of income that a company pays to shareholders.
The dividend payout ratio is calculated by dividing a company’s total dividends paid by its net income.
Dividend payout ratio (%) = dividends paid / net income
Investors can also calculate the dividend payout ratio on a per share basis, dividing dividends per share by earnings per share.
Dividend payout ratio (%) = dividends per share / earnings per share
The dividend payout ratio can help determine if the dividend payments a company distributes make sense in the context of its earnings. Like dividend yield, a high dividend payout ratio may be good, especially if investors want a company to pay more of its profits to investors. However, an extremely high ratio can be difficult to sustain.
If a stock is of interest, it may help to check out the company’s dividend payout ratios over an extended period and compare it to comparable companies in the same industry.
Company Stability
Investors may also wish to focus on stable, well-run companies with a reputation for paying consistent or rising dividends for years. Dividend aristocrats – companies that have paid and increased their dividends for at least 25 years – and blue chip stocks are examples of relatively stable companies that are attractive to dividend-focused investors.
These companies, however, do not always have the highest dividend yields. Nor do these companies pay monthly dividends; most companies will pay dividends quarterly.
Furthermore, keep in mind a company’s future prospects, not just its past success, when shopping for high-dividend stocks.
Tax Implications
Dividends also have specific tax implications that investors should know. A “qualified dividend” is a type of dividend that qualifies for the capital gains tax rate, which is usually a more favorable tax treatment. An “ordinary dividend” doesn’t get that lower tax preference and is taxed at an individual’s income tax rate.
Investors will receive a Form DIV-1099 when $10 or more in dividend income is paid out during the year. (If the dividends are in a tax-advantaged account (an IRA, 401(k), etc.), the money will grow tax-free until it’s withdrawn.)
💡 Recommended: Ordinary vs Qualified Dividends
Pros and Cons of Investing in Monthly Dividend Stocks
As noted above, two of the most significant advantages to investing in dividend stocks are passive income (income that requires little to no effort to earn and maintain) and reinvestment (using dividend payments to buy more stocks, thus compounding returns).
Another plus for those who choose solid dividend stocks is that they may receive payments from those investments even if the market falls. That can help insulate investors during tough economic times. It might prevent investors who make regular or occasional withdrawals from their stock portfolio from selling at a low to get the money they need.
Regular dividends may also allow investors who reinvest the gains to buy stocks at a lower price while the market is down. Additionally, the stocks of mature, healthy companies that pay dividends also may be less vulnerable to market fluctuations than a start-up or growth stock.
But no investment strategy is perfect, and dividend stocks have some disadvantages.
💡 Recommended: Pros & Cons of Quarterly vs. Monthly Dividends
Dividends are not obligations; a company can decide to suspend or cut its dividends at any time. It could be that the company is truly in trouble or that it simply needs the money for a new project or acquisition. This is especially true for monthly dividend stocks; many REITs that pay monthly dividends suspended or cut dividends during the Covid-19 pandemic.
Either way, if the public sees the cut as a negative sign, the share price could fall significantly. And if that happens, an investor could suffer a double loss.
Then there’s the matter of double taxation. First, the company must pay taxes on its earnings. Then the shareholder must pay taxes again as an individual.
Finally, choosing the right dividend stock can be tricky. As noted above, the metrics for analyzing the most attractive dividend stocks are quite different from those for selecting growth stocks.
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Pros and Cons of Monthly Dividend Stocks |
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|---|---|
| Pros | Cons |
| Passive income | Monthly dividend stocks are not common |
| Dividend reinvestment leads to compounding returns | Share price appreciation may be limited compared to growth stocks |
| Investors may earn a return even when the stock price goes down | Dividend payments can suddenly be cut or suspended |
| Qualified dividends have preferential tax treatment | Tax inefficiency through double taxation |
Things to Avoid When Investing in Monthly Dividend Stocks
When investing in monthly dividend stocks, there are a few things to avoid:
• Avoid investing in a company that pays a monthly dividend solely because it pays a monthly dividend. Many companies pay monthly dividends, but not all are suitable investments. Do your research and only invest in companies that you believe will be successful in the future.
• Avoid investing in a company or industry that you don’t understand. If you don’t understand how a company makes money, you should hesitate to invest in it.
• Avoid investing all of your money in monthly dividend stocks. Diversify your portfolio by investing in other types of stocks, bonds, funds, and other securities.
The Takeaway
It may seem ideal to invest in monthly dividend stocks to get paid every month. However, this strategy shouldn’t be the ultimate way to reach your financial goals. A well-diversified portfolio with stocks that can reliably maintain or increase dividends may be a better way to look at your dividend investing strategy.
If you’re ready to build your portfolio with dividend-paying stocks, SoFi Invest® can help. A SoFi online brokerage account allows you to buy and sell stocks and ETFs with no commissions for as little as $5. With SoFi, you can invest in dividend-paying stocks and ETFs today.
FAQ
How can you get stocks that pay monthly dividends?
To invest in stocks that pay monthly dividends, you need to research financial websites and publications to find companies that pay dividends monthly. There are not many monthly dividend stocks, especially compared with stocks that pay quarterly dividends.
How can you determine the stocks that pay the highest monthly dividends?
Investors use metrics like high dividend yields and dividend payout ratios to determine the stocks that pay the highest monthly dividends. However, stocks that pay the highest monthly dividends can change over time.
How do monthly dividend stocks work?
A monthly dividend stock is a stock that pays out dividends every month instead of the more common quarterly basis. This can provide investors with a steadier stream of income, which can be particularly helpful if you rely on dividends for living expenses.
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