Moez Mahraz, an analyst at 5iResearch, weighs some of the benefits and danger signals associated with companies that pay monthly dividends.
Most companies pay dividends on a quarterly basis. One of the problems with this is that retirees need to put in a lot more work in organizing a dividend calendar to make sure they have at least a portion of their holdings paying dividends each month. Otherwise, you may get paid in say, January and February but not in March and then again April.
Even if you are able to match up the months, it is difficult to get the amounts to be the same every month, so you will likely end up with inconsistent amounts each month. Many investors may also overlook the fact that if they trim down a particular holding they will also trim down their dividend payment of that holding, which complicates the management of income streams even further.
Benefits of monthly dividends
Owning a set of stocks that pay you a relatively fixed amount each month is a lot simpler and easier on budgeting because most expenses are billed monthly (except some like property taxes). This does not mean that income investors should only own stocks that pay monthly dividends, however. One strategy could simply be to own enough in monthly dividend stocks to cover a certain portion of your expenses while owning other dividend-paying stocks that provide you with ‘quarterly bonuses’.
Another benefit to monthly dividends is that cash is more readily available to take advantage of opportunities that come up on a monthly basis rather than having to wait every quarter for new cash to come from your investments. This also helps with any investor’s dollar cost averaging strategy by taking monthly distributions and automatically reinvesting them in quality companies, if applicable.
Why would a company pay dividends monthly?
Companies pay dividends at whatever frequency they see fit to their overall business, cash flow and investor needs. The more income-oriented a company is, the more likely it is to pay a monthly dividend. A company that receives consistent and more frequent revenue should be better able to sustain a monthly dividend.
In fact, a significant portion of the companies that pay monthly dividends are REITs and this makes sense when considering that REITs usually earn rental income from their tenants on a monthly basis. This naturally translates over to shareholders who desire a monthly income stream.
Be wary of high yields
High yield can mean higher risk. That juicy double-digit or high single-digit yield has misled many investors in the past and high yields are quite common among monthly dividend companies since their distributions tend to be catered more toward income investors. A high dividend yield does not mean it will offset the drops in share price.
High payout ratios may be a danger sign
When it comes to evaluating whether or not a dividend is likely to be sustainable, we like to look at payout ratios. A higher payout can mean a company’s cash flows are being squeezed in order to satisfy investors, and this can potentially backfire on investors through dividend cuts or worse, eliminating the dividend altogether.
High debt levels must be addressed first
Debt is also important when looking at dividend sustainability because a company with high debt means more cash has to be allocated to interest and principal payments and potentially less to dividends. Debt is also linked to the previous point on payout ratios because a higher portion of earnings that is paid out to shareholders means fewer earnings retained for growth and reinvestment in the company.
This is an edited version of an article that was originally published for subscribers in the December 2019/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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