As most of you have noticed, most securities pay their dividends quarterly. But those who take the time to find and invest in securities that pay their dividends monthly have a slight advantage.

Investing in securities that pay their dividends monthly as opposed to quarterly can give you an edge over time.

Advantages if you are reinvesting your dividends

For those who are reinvesting their dividends, monthly payments as opposed to quarterly dividend payments will make a very small difference in the short term, but over the long run the deference will become bigger. By taking advantage of the power of compounding, monthly dividend reinvestments will grow at a faster rate as opposed to getting that same dividend quarterly.

Advantages if you are living on your dividends

For those that are already retired or nearing retirement recieving dividend payments monthly as opposed to quarterly will allow for a consistent, predictable monthly income to live off, allowing you to more easily match income to expenses and simplify your financial planning.

Working Example #1

For example, let’s say you buy 1,000 shares of a $10 stock, which pays a $1.20 per share annual dividend. After your first monthly dividend payment you will receive a $100 dividend which when reinvested buys you 10 shares. When the second month comes around you are now getting the dividends on 1010 shares as opposed to 100, so your dividend payment will be $101 instead of $100. Your third months dividend will now be based on 1020 shares and will be $102.01 as opposed to 100. After three months of monthly dividend payments you would have gotten $303.01 in dividends. Now if you where getting the dividends quarterly your quarterly payment would have been $300. This is what the power of monthly compounding can do as opposed to quarterly compounding. By receiving dividend payments monthly instead of quarterly you have received a larger return in the same amount of time and have accumulated more shares. This is not a huge difference over three months but over 10 or 20 years it can make a substantial difference.

Working Example #2

Now let’s look at the same transaction as in example #1 in a different way.

1,000 shares of a $10 stock, which pays a $1.20 per share annual dividend. That comes out to a 12% yield per year, or 1% per month. If the dividend is paid monthly and then reinvested back into the stock, then in one year you would receive $1,268.25 in dividends. As a fraction of your original $10,000 investment, your total compounded returns would be 12.68%.

If this same investment paid the dividend distribution quarterly instead, you would receive a 3% dividend every three months. By years end, your dividend earnings would be $1,255.09, or a 12.55% return on your original $10,000 investment.

As you can see from the table below, your compounded returns are slightly better — by 13 basis points — from the monthly versus quarterly payout if you hold the stock for one year only.

The advantages of the monthly dividend payments as opposed to quarterly become more apparent over the long run. Using the same calculations as were used above, your compounded gains after 10 years of monthly dividend payments come to $23,003.87 giving you a 230.04% return on your original $10,000 investment, or an average of 23.00% annually.

If these dividends where paid quarterly instead of monthly, your compounded returns over the same 10 year period would be $22,620.38, giving you a 226.20% gain, or 22.62% annually. Over this longer term, your compounded returns improve by 38 basis points per year if receiving dividends monthly instead of quarterly.

Conclussion

So what we learn here is that monthly dividend payments provide an advantage over quarterly dividend payments, in the form of a somewhat better return and a steady, predictable income stream. Please keep in mind, however, that making a decision to purchase a stock or fund based solely on how often the dividend is paid is not a good idea. Your main considerations should be the quality of the dividend payment, cash flow, earnings growth and dividend growth.

In a previous article I have listed several hundred monthly dividend paying securities which are an excellent starting point for your research. Some of these securities have better fundamentals then others, so please research them thoroughly before jumping in for the dividend payments. I will keep updating this list as I find more securities that pay monthly dividends and eventually I will add a section to this website specifically dealing with monthly dividend stocks.

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