Investing in stocks can help an investor build a portfolio over time while diversifying to manage risk. Adding dividend-paying stocks to the mix can also help to create a steady stream of income.
Not all stocks pay dividends. But those that do may pay out dividends on a monthly or quarterly basis. When investing in dividend stocks, it’s important to consider whether it’s better to receive monthly dividends or quarterly dividend payments.
For those investors interested in generating passive income inside their portfolio, it helps to know how stocks that pay dividends monthly versus quarterly compare.
Quick Dividend Overview
A dividend is a percentage of a company’s profits that are paid out to shareholders, typically on a fixed schedule, i.e. monthly, quarterly, annually, etc. If a company issues a dividend outside of its regular payment schedule, this is referred to as a special or extra dividend.
If you’re not familiar with dividends or dividend-paying stocks, here’s a quick primer on how dividends work.
Do All Stocks Pay Dividends?
No, not all stocks pay dividends. When looking at value vs growth stocks, an investor should bear in mind that growth stocks typically don’t offer a dividend payout to investors because the company reinvests all profits back into growth projects.
A value stock, on the other hand, may be in a better position to pay out dividends. Value stocks are companies that are undervalued by the market. These companies can pay out reliable dividends to investors and also offer capital appreciation if their stock price increases over time.
Companies that have an extended track record of paying dividends may be referred to as Dividend Aristocrats. These are S&P 500 companies that have consistently increased their dividend payout to investors over the previous 25 years or longer.
Why Do Companies Pay Dividends?
Public companies aren’t required to pay out dividends to their shareholders. But a company may choose to do so for any of the following reasons:
• As a reward to shareholders
• To attract new investors
• Because there’s no need to reinvest dividends in the company’s growth
Dividend payments are a way to measure a company’s financial well-being. If a company consistently pays out dividends to shareholders, that can signal financial strength, which may be a draw to new investors.
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Monthly Dividends vs Quarterly Dividends: How They Work
If a company chooses to issue dividend payouts to its shareholders, it can determine the schedule for doing so. That can involve paying monthly dividends or paying them quarterly instead.
Whether an investor has monthly paying dividend stocks or quarterly paying dividend stocks, there are different ways they can receive those payments. For example, the company might issue a check for the dividend amount at the appointed time.
Some companies may allow investors to use their dividends to purchase additional shares through a Dividend Reinvestment Plan (DRIP). With a DRIP, investors can use their dividend payouts to purchase full or fractional shares of the same company.
This might be preferable to receiving a check quarterly or monthly if an investor is looking to grow their portfolio, versus creating an income stream. Another advantage of using a DRIP with stocks that pay dividends monthly or quarterly is that an investor may be able to avoid commission fees by reinvesting.
Are Monthly Dividends Better Than Quarterly Dividends?
If you’re receiving dividend payouts from one or more stocks in your portfolio, you may not think there’s much difference in when you receive those payments. But investing in stocks that pay dividends monthly versus quarterly could yield some important benefits.
Monthly Dividend Payouts as Regular Income
First, consider the advantage of receiving regular income (assuming the dividends are not being reinvested through a DRIP). If a portfolio includes a number of monthly paying dividend stocks that have higher dividend yields, an investor could have a nice chunk of income coming their way each month, and possibly even live off that dividend income.
An investor could use that money to cover regular bills, grow their savings, pay down debt, or invest it for the future through an IRA or college savings account. Having that added income stream can make budgeting and planning for short- or long-term financial goals easier. Those things could be more difficult to achieve with dividends that only arrive on a quarterly basis.
Reinvesting Monthly Dividend Payouts
Next, and perhaps more importantly, it may be possible to generate more income from monthly dividends by reinvesting them consistently into additional shares of stock. This ties in to the concept of compounding interest and how it works.
Compounding interest is essentially interest an investor earns on their interest, and it can be a powerful tool for growing wealth over the long term. The more time one has to invest and reinvest dividends, the more time one has to benefit from compounding’s effects.
In theory, investing in stocks that pay dividends monthly versus quarterly could work in an investor’s favor if they’re able to compound their money faster. So not only could they benefit from more regular dividend income payments, they could also potentially see more income from those stocks over time.
Whether this bears out in an investor’s portfolio depends largely on the dividend-paying stocks they own, of course. That’s why it’s important to understand how different stocks compare when investing for dividends to make sure you’re choosing ones that fit your personal investment goals.
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How to Create Monthly Income With Quarterly Dividends
It’s possible to reap the benefits of stocks that pay dividends monthly even if your portfolio only includes stocks that pay dividends quarterly. But this requires a little more work compared to choosing stocks that pay monthly dividends already.
The process involves choosing quarterly dividend stocks that can be staggered over 12 months. For example, an investor might choose three stocks that pay quarterly dividends:
• Stock A pays dividends in January, April, July and October
• Stock B pays dividends in February, May, August and November
• Stock C pays dividends in March, June, September and December
By shaping a portfolio this way, an investor could get the benefit of monthly dividends without having to own stocks that pay dividends each month. But it’s important to consider what kind overall income one could generate when compounding interest is taken into account, versus choosing stocks that already pay monthly dividends.
Investing in a mix of growth stocks and income stocks that generate dividends can help an investor build a well-rounded portfolio. For individuals who aren’t investing yet, getting started can make it easier to leverage the benefits of compounding interest over time.
When comparing dividend stocks, it helps to consider how frequently you’ll be able to receive those payments, as well as the amount of the dividend itself.
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