Monthly vs. Quarterly Dividends: Which Earns Higher Returns?

While most securities pay their dividends quarterly (every three months), you might see others paying monthly. Although quarterly payments are far more typical, more frequent monthly dividends may provide a slight advantage for investors.

The Difference Between Monthly and Quarterly Dividends

Companies that pay out dividends can do so on the schedule they choose. With that, the major difference between monthly and quarterly dividends is the payment schedule.

A company that pays out a monthly dividend will provide their investors with a dividend twelve times each year. On the other hand, a company with a quarterly dividend schedule will provide their investors with a payment four times each year.

How Does Dividend Compounding Work?

You might be familiar with the power of compounding as a tool to build wealth. Essentially, as your initial investment earns interest, the earned income will also start to earn interest. Over time, the initial funds can grow considerably.

Dividend compounding works in the same way. As an investor, you can choose to automatically reinvest the dividends you earn. As you continue to reinvest dividends, your portfolio will grow through the act of reinvesting and the power of compounding.

Pros and Cons of a Monthly Dividend

As you make this investment decision, you should explore the advantages and disadvantages of a monthly dividend.

The major advantage is fairly obvious -- a monthly dividend creates a more regular income. Instead of budgeting out your funds on a quarterly basis, you can have a more regular cash flow through monthly dividends. Although it is possible to achieve this through staggered quarterly dividends, it can be tricky to achieve.

Beyond the regular cash flow, a monthly dividend can potentially compound more quickly. After all, the fact that you are able to reinvest your dividend more regularly should lead to a faster rate of growth.

The downside of a monthly dividend is that a monthly dividend expectation may put undue pressure on the company. Instead of planning out cash flow expectations on a quarterly basis, managers will be forced to think in a monthly time frame. Although that is not necessarily bad, it could lead to inefficiencies, ultimately leading to less profit for the investor.

Pros and Cons of a Quarterly Dividend

As an investor with quarterly dividends, you'll have to map out your budget for an entire quarter. It is completely possible to budget effectively on a quarterly basis. But it may be a bit more challenging than a monthly budget. Ultimately, you'll lose the convenience of a monthly budget if you choose quarterly dividends - assuming you rely on dividends as part of your monthly cash flow.

Additionally, the less frequent dividend opportunities can lead to a lower overall return on your investment.

The advantage of a quarterly investment is that company managers can potentially operate more efficiently. As an investor, you want any company you choose to have competent managers that can create more return on your investment. With quarterly dividend expectations, managers may have more room to create the profits you are seeking.

Example of Monthly vs. Quarterly Dividends

For example, let's say you buy 1,000 shares of a $10 stock, which pays a $1.20 per share annual dividend. That equates to a 12% yield per year (or 1% per month).

If the dividend is paid monthly and then reinvested back into the stock, you would receive $1,268.25 in dividends after one year. As a fraction of your original $10,000 investment, your total compounded returns would be +12.68%.

Say that the dividend is distributed quarterly instead. Every three months, you'd receive 3% of your original investment. At the end of the year, you would earn $1,255.09 in compounded returns – or a +12.55% return on your investment (ROI) - on the initial $10,000.

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

Monthly Payments

Total Dividends $1,268.25
Return on Investment 12.68%

Quarterly Payments

Total Dividends $1,255.09
Return on Investment 12.55%

What does this mean in real numbers over time?

$10,000 earning a 12% annual return compounded monthly will result in $33,003.87 after 10 years. If you compound it quarterly instead, the balance is $32,626.38 after 10 years.

Quarterly vs Monthly Dividends: Which is Better?

Monthly dividends provide a slightly better return over time due to more frequent compounding. However, they could lead to short-term thinking on the part of the company which may have a bigger negative impact than any benefit you could receive from compounding.

If you are receiving dividend payments, vs reinvesting them, monthly dividend payments provide a steadier income stream which makes budgeting simpler. That said, with a little effort, you can also create a consistent income stream by carefully selecting stocks that pay their quarterly dividends at different time slots.

For example, income investors could purchase a security that pays a dividend in January, April, July, and October. Meanwhile, they could invest in two others: One that pays in February, May, August, and November and another paying in March, June, September, and December. By holding these three securities, you would receive regular dividend checks every month.

Also, those of us who are disciplined enough to build portfolios that are large enough to live on their dividends are probably also disciplined enough to budget on a quarterly basis.

How to Tell if a Dividend is Paid Quarterly or Monthly?

As you make your investment decisions, you'll need to get familiar with a few terms to help you find out when a dividend will be paid out.

First, the dividend declaration date is when a company will announce their upcoming dividend payment. The next important date is the dividend record date when a company determines who its current investors are. Investors that own the stock on that particular day will receive the dividends.

The two dates above are important to keep in mind once you own the stock. But you will need to take a look at the ex-dividend date to determine when a company last paid out dividends.

You'll be able to find this information on the NASDAQ site. Take a look at the dividend: and the indicated annual dividend. You can divide the indicated annual dividend by the most recent dividend to determine if it is a monthly or quarterly payment.

For example, let's say that the indicated annual dividend is 0.4 and the dividend is 0.1. With that you can determine that the dividends are paid quarterly.

What about Annual Dividends?

The basics of an annual dividend are the same as quarterly and monthly dividends. Essentially, you'll receive a payment as an investor of the company. However, you'll only receive these payments one time each year.

Although the yield is only provided once each year, these investments can still be worthwhile.

Summary

Monthly dividends likely have a slight edge over quarterly payouts. They provide a steady income stream and marginally higher returns on your investment. Still, the differences are not typically substantial, and the main focus of your stock selection should be on the quality of the dividend payments (not on their frequency)

For example, most companies that pay monthly dividends have a higher payout ratio, meaning they are retaining less for reinvestment into the company and are thus riskier for the investor in the long term.

In other words, considerations like earnings prospects and dividend growth potential are far more critical to your overall returns than dividend frequency. After all, you've been financially savvy enough to create room for savings and investments. With that, you should be more than capable of budgeting the cash flow that comes from the quarterly dividends created by your solid investment choices.