5 Top Monthly Dividend Stocks
Most dividend stocks have one drawback for income investors, though: They tend to make their dividend payments only on a quarterly basis. That's fine for the company, but it doesn't always work out well for shareholders who have monthly income needs. A few dividend stocks, however, have figured out that meeting their investors' needs can be a smart move, and they've therefore chosen to make monthly dividend payments. Although income investors naturally prefer the highest dividend yields they can find, the highest-yielding monthly dividend stocks aren't necessarily the ones with the safest dividends. Shareholders have to seek out top dividend stocks not based solely on yield but also on other features, such as whether they offer dividend reinvestment plans. Later in this article, we'll reveal five top monthly dividend stocks, but first, let's take a closer look at why monthly dividends are attractive and what you have to do to avoid potential mistakes in choosing stocks.
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What's a dividend and how does it work?
A dividend is an amount of cash that a company chooses to pay to its shareholders. For each share of stock that you own, the company will pay you a certain amount, and the more stock you own, the greater your total dividend will be. Most companies pay dividends on a regular schedule, with quarterly payments (coming four times a year) being the most common.
The mechanics of how dividends get paid out are a bit tricky to understand. Companies set a date, called the record date, on which they'll look at the current owners of shares and pay dividends to them. A second date, called the ex-dividend date, marks the first day on which purchases and sales of shares will not give the buyer the right to that particular dividend payment. So if the ex-dividend date of a stock is
Many investors look at the dividend yield as an important metric. The dividend yield is equal to the total annual dividend payments divided by the stock price. So if you own a stock priced at
Why do investors like monthly dividends?
At first glance, it might seem completely unimportant how often a company pays a dividend. As long as the total amount of the dividend payment is the same over time, whether a company parcels those payments out on an annual, semiannual, quarterly, or monthly basis won't have an impact on how much money goes into your pocket.
From the company's perspective, making dividend payments less often can be a positive. Some companies justify paying dividends less frequently by saying that the expenses of processing each individual dividend can add up, and so making four quarterly payments costs roughly four times as much as making just a single payment annually.
Meanwhile, investors generally fall into two categories with respect to their needs for dividend income. If you don't actually need cash from your portfolio, then you won't value frequent dividend payments as much. That's especially true for those who plan to participate in dividend reinvestment plans, or DRIPs for short. These plans take the dividends that you would have received and, instead, reinvest them into additional shares of the company's stock. This has the benefit of gradually increasing your position in a given stock, but it's not as critical whether those reinvestments happen once, twice, four times, or 12 times a year.
Monthly dividends work best for investors who have regular monthly living expenses and like having income that comes in on a matching schedule. Sure, you can put your quarterly or annual dividend income into a separate bank account and budget it out over three or 12 months. But it's a lot more convenient just to see the money coming in every month and then to arrange to have it put where it can go toward paying your bills in a timely manner without any extra effort.
Why you shouldn't just pick the stocks with the highest yield
If you need portfolio income, the temptation is to go with the investments that will generate as much of it as possible. You can find dividend stocks that have extremely high yields compared to prevailing interest rates. Yields of 10% or more aren't unheard of, and many more stocks pay dividends in the 5% to 10% range. With most fixed-income investments like bonds and bank CDs paying a whole lot less than that in interest, those high-yielding dividend stocks look awfully tempting.
But there's danger in concentrating entirely on the dividend stocks with the highest yields. In many cases, a yield is high because the company's stock price has fallen dramatically due to troubles with the underlying business. It's possible for companies in those situations to rebound and recover fully without ever having to make any changes to their dividend policies. However, what often happens is that a company has to reduce or even entirely eliminate its dividend in order to preserve capital for its own business needs. When that occurs, it often deals a double blow to income investors: Not only does the shareholder get less income, but the share price typically takes a hit as well.
One way to detect these so-called dividend yield traps is to look at the underlying fundamental business of the company to see whether it has the capacity to support future dividend payments. One simple thing you can do is to compare the total dividends the company pays annually with the company's earnings. If a company earns a lot more than it pays out in dividends, then that puts the company in a better position not only to sustain its past dividend payments but also to boost them in the future. Conversely, if a company pays out more than it earns in dividends, it can be a sign that the size of the current dividend payment is unsustainable, as it suggests that the company might have to borrow money in order to keep paying dividends at their present level. Investors will often refer to the payout ratio, which is the annual dividend rate divided by annual earnings per share, expressed as a percentage. Payout ratios above 100% indicate that a company is paying more in dividends than it's earning, while payout ratios below 100% show a surplus of earnings.
Payout ratios aren't a perfect metric for detecting yield traps, though, because earnings aren't always the best indicator of a company's health. In particular, some of the special types of businesses that are well-known for making monthly dividend payments -- such as real estate investment trusts (REITs), royalty trusts, and business development companies (BDCs) -- have special accounting rules that can distort reported earnings dramatically. For these industries, alternative measures of dividend sustainability can more accurately reflect likely future dividend-related actions. These alternatives include using free cash flow or funds from operations. Free cash flow, which measures the amount of cash a company's operating business generates and then subtracts out money spent on major capital projects, can give a clearer picture of what's happening with the company's actual working cash balance, especially in businesses that have a lot of noncash accounting adjustments that make official earnings misleading. Similarly, funds from operations takes out the adjustments made for depreciation of property and gains and losses on property sales, making it especially useful for real-estate-rich businesses that do many transactions involving property that can distort operating performance.
Also, bear in mind that some companies are required to have certain payout ratios in order to comply with various rules and regulations. For instance, REITs and BDCs get special tax treatment, but in order to get it, they have to pay out 90% of their earnings as dividends. That high of a payout ratio for a regular company might raise doubts about dividend sustainability, as even most mature companies tend to keep payout ratios below the 75% to 80% range in order to give themselves some flexibility for deploying capital back into their businesses. For dividend stocks that have significant growth potential, even lower payout ratios are ideal in order to provide ample capital to take advantage of strategic opportunities as they arise.
Top monthly dividend stocks worth a closer look
With all that as foreground, below are five of the most promising top monthly dividend stocks for investors to consider.
Stock
Current Dividend Yield
Earnings Payout Ratio
11.4%
75%
6.5%
104%
5.3%
109%
5.2%
231%
4.5%
94%
Data source: Yahoo! Finance.
These stocks have different focus areas, but they all offer healthy dividend yields and good track records of making monthly payouts to their shareholders.
The best environment for AGNC is one in which short-term interest rates are low and moving lower. Such an environment allows the mortgage REIT to borrow extensively with short-term financing, using the money it obtains to build up a larger portfolio of longer-maturity mortgage-backed securities. When yields on long-term bonds are substantially greater than the rates on short-term borrowing, AGNC is able to make a substantial profit. Those favorable conditions have prevailed for much of the past decade, and AGNC's total returns -- considering both dividends and share-price movements -- have been good.
The challenge that AGNC now faces is that those conditions appear to be changing. The
Unlike AGNC,
LTC's addressable audience is poised to grow still further. Over the next 45 years or so, the population of senior citizens is expected to double, and number of people over 85 years old will see a threefold increase by 2050. Given that the older segment of retired seniors is the most likely to need the long-term care that LTC's facilities provide, this demographic shift could have dramatic growth implications for the REIT over the long haul -- and for its payout to shareholders.
Unlike the first two stocks mentioned above,
Like many midstream energy providers, Pembina hasn't gotten through the past few years of weak oil prices without seeing some pressure on its core business. That showed up not only in its business results but also in its dividend payouts, which fell as crude prices dropped from triple-digit levels to as low as
The company didn't shy away from investing in opportunities for growth even when markets hadn't yet established themselves on a path back toward sustained price gains, taking on nearly
Now, things are starting to go a lot better for Pembina. The company is working hard to get liquefied natural gas from rich inland gas fields to terminals on the
There's no company that embodies the monthly dividend concept better than
Some investors have worried that
The telecommunications industry has historically been a good one for dividend payers, and
Shaw faces many of the same pressures that its peers in the industry have had to deal with lately. Customers north of the
Nevertheless, Shaw knows what it needs to do in order to stay ahead of the competition. The telecom giant announced recently that its first 5G technical trials in the
When you think dividends, think monthly
Not all investors need regular income, but if you do, monthly dividend stocks are some of the best investments you can find. By matching up the timing of when you get portfolio income with when you need to spend it on your living expenses, you can be more secure that you'll be able to meet your financial needs from your investments.
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