Best Monthly Dividend Stocks and ETFs

Dividends are payments that a company makes to its shareholders. These payments come out of a company’s profit. Companies issue dividends on a regular schedule. A typical quarterly dividend issues payouts every three months. However, there are a select group of companies that have a monthly payout schedule or issue dividends on an annual schedule.

Investors can receive the dividends directly as income or they can elect to re-invest their dividend payment to buy additional shares of the company’s stock. This ability to receive regular income is the primary reason dividend stocks appeal to income-oriented investors.

This is because many fixed income investors rely on regular income from their investments to help pay the bills. However dividends that pay at quarterly intervals, and bonds that pay out semi-annually, may leave gaps. These gaps can lead investors to dip into the principal of their retirement fund. Aside from creating elaborate dividend calendars, one way these investors can help mitigate avoid these gaps is by having a portion of their dividend investments in stocks that pay monthly dividends.

As stated above, a dividend is paid out of a company’s profit before it makes it to the bottom line as retained earnings. A company can reward shareholders in several ways. The most obvious is through stock price appreciation (i.e. capital growth). A second way is by issuing a dividend. In order to pay a dividend, a company needs to be able to have the cash flow needed to support the dividend.

A young, fast-growing company will typically reinvest profit into their business because shareholders expect aggressive growth and are willing to assume the heightened risk that comes with that growth. Companies that are into the mature phase of their business cycle may not be able to deliver the same return for their shareholders by reinvesting their profit into the business.

For this reason, they make the decision to take a portion of their profits and directly pay shareholders as a dividend. This does not mean they won’t undertake capital investments or take on debt. It just means that their primary objective is stability, not aggressive growth.

Dividend-paying companies are commonly in defensive sectors like utilities and health care. Companies that manufacture consumer staples also fall into this category. Defensive stocks tend to hold their value in any economy. For example, individuals get sick in any economy so pharmaceutical stocks tend to be impervious to recessions. In the same way, consumers still need to pay for electricity, water, and natural gas so these stocks fall into the defensive category.

Why Do Companies Issue Monthly Dividends?

A monthly dividend company can sustain the cash flow needed to support a monthly dividend. Some of the most popular examples of monthly dividend paying stocks are a real estate investment trust (REIT) such as Realty Income (NYSE:O) which bills itself “The Monthly Dividend Company.”

Business development companies (BDCs) such as Broadmark Realty Capital (NYSE: BRMK) and Prospect Capital (NASDAQ: PSEC) are examples of companies that issue dividends with monthly payouts.

These stocks are required to return at least 90% of their profit to investors as a dividend. Many of these companies generate income through collecting rent on a portfolio of industrial properties or residential loans. This gives them the reliable cash flow necessary to safely pay dividends.

Many companies issue monthly dividends with the intention of maximizing shareholder value. However, like any investment, investing in monthly dividend stocks contains risks. Many of these risks can be anticipated if an investor does their due diligence of a company’s business.

Of course, investors need to look at a company’s history of paying monthly dividends. But past dividend performance does not mean that a company is a sustainable dividend stock. To get a sense of this, investors should look at a company’s financial statements including their balance sheet, income statement, cash flow statement and key performance and profitability ratios. These documents will provide information on how much cash a business is generating and how that cash is being deployed.

In addition to making sure that a company has a reliable history of paying dividends, investors need to be aware of any cuts in monthly dividends. Although a company may have many reasons for cutting their dividend, it may mean that the company’s performance is slowing to a point where a monthly dividend may eventually become unsustainable. Sometimes, the company may simply need to change to a quarterly or annual dividend schedule. However, in the worst case scenario, the company may make the decision to stop issuing a dividend altogether.