Earn Higher Returns by Investing in Securities Paying Monthly Dividends

posted on 06-07-2019

You may have noticed that most securities pay their dividends quarterly, that is, every three months. Others pay monthly and a few securities may pay annually or semi-annually. Although quarterly payments are far more typical, the more frequent monthly dividends do provide a slight advantage for investors.

For starters, monthly payments give you a simple way to get a steady income stream throughout the year. 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 which 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 a dividend check every month.

If you are letting your dividends grow instead of using them for income, then investing in securities that pay monthly dividends can give you a slight edge here, too. They allow you to grow your dividend income somewhat faster through the magic of compounding. In the short-term, the difference between monthly and quarterly dividends is fairly negligible, but over the long-term, the monthly installments do add up.

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, 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%.

Now let's say the dividend is distributed quarterly instead. Every three months, you 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) of the initial $10,000.

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.

Monthly Payments                            
Month    Principal         Dividend               
1             $10,000.00       $100.00                  
2             $10,100.00       $101.00                    
3             $10,201.00       $102.01                             
4            $10,303.01        $103.03
5             $10,406.04       $104.06                               
6             $10,510.10       $105.10
7             $10,615.20       $106.15              
8             $10,721.35       $107.22
9             $10,828.57       $108.28       
10           $10,936.85       $109.37
11           $11,046.22       $110.46
12           $11,156.68       $111.57

Total Dividends             $1,268.25
Return on Investment       12.68%

Quarterly Payment
Quarter     Principal        Dividend
1               $10,000.00       $300.00
2               $10,300.00       $309.00
3               $10,609.00       $318.00
4               $10,927.27       $327.82

Total Dividends              $1,255.09
Return on Investment         12.55%

The advantage of the monthly payouts becomes somewhat more significant for a long-term investment. Using the same calculations as we did above, your compounded gains on the monthly dividend if you hold the stock for 10 years come to $23,003.87. That gives you a +230.04% return on your original $10,000 investment, or an average of +23.00% annually.

Your compounded returns on a quarterly dividend payout over 10 years are $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 for a monthly dividend payer.

The bottom line is that monthly dividends do have a slight edge over quarterly or less frequent payouts. They provide a steady income stream and marginally higher returns on your investment. Still, the differences are not that great, and the main focus of your stock selection should be on the quality of the dividend payments, not on their frequency. In other words, considerations like earnings prospects and dividend growth potential are far more critical to your overall returns than dividend frequency