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Why Monthly Dividend Stocks Make The Best Investments

Updated on January 3, 2014
Realty Income is known as "the monthly dividend company."
Realty Income is known as "the monthly dividend company." | Source

Income investors or retirees seeking a stable, predictable stream of income should strongly consider buying an ETF or stock which pays out monthly dividends.While these stocks are less common than quarterly payers, there are still some great stocks out there which will pay you each month.

Even better, if you choose to re-invest your shares each month by enrolling in a dividend re-investment plan (DRIP), you will be quite shocked to see how much money you will have made over time due to the powers of compound interest.

I believe there are two main reasons why investors should consider adding a stock or ETF which pays out a dividend each month:

Reason #1 - Compounding Monthly Leads to Bigger Gains!

If you own a stock which pays a dividend every single month, as opposed to a quarterly paying stock, you have a big advantage!

It is a mathematical fact that if your interest is compounded every single month, you will end up with more money - as opposed to compounding your money once every four months, semi-annually or annually.

*Here is an example. Let's say you have $10,000 to invest in a dividend paying stock. You wisely choose to re-invest your dividends in a DRIP account. Stock A earns you 10 percent annually for 5 years, but pays you a quarterly dividend. Stock B also earns you 10 percent annually for 5 years, but pays your dividend monthly. You add no further capital into each stock.

After 5 years, the value of your position in stock A amounts to $16,386.16, a gain of $6,386.16. Not bad. However, in stock B you will have $16,453.09, or about $67 more than stock A! Remember, you earned exactly the same amount in interest per year. However, compounding your money every month means bigger gains.

See for yourself at Investor.Gov.

Reason #2 - More Flexibility

Receiving dividends every month is much more convenient than getting dividends quarterly, semi-annually or annually. This is especially true for those in retirement who needs to receive income every single month.

Think about this - when you budget your income and expenses, do you do it each month or each quarter? Think about how much easier it is to do it by month.

Bottom line? Getting your dividend checks each month makes budgeting your money much, much easier!

Monthly vs. Quarterly and Annually

Dividend Payout
Initial Investment Amount
Value After 10 Years (10% Annual Gain)
Monthly
$10,000
$27,070.41
Quarterly
$10,000
$26,850.64
Annually
$10,000
$25,937.42
The numbers don't lie - receiving a dividend each month and re-investing it is a great way to get wealthy!

Adding Money Each Month Pays Off Big!

Dividend Payout
Initial Investment Amount
Value After 10 Years (10%, Plus $50/month addition)
Monthly
$10,000
$37,312.66
Quarterly
$10,000
$36,961.02
Annually
$10,000
$35,499.88
Here is how much money you will have made if you add just $50 a month to your portfolio!

Time is Your Friend

Source

What is Dollar Cost Averaging?

Another tremendous advantage to receiving your dividends each month is that you get to dollar cost average your investment without actually having to buy any more shares (each trade could cost you $7-10 per trade).

Automatic Dollar cost averaging works this way - when your shares are priced higher, you purchase less shares, but when your shares are priced lower, you purchase more shares. You are also spreading out your risk by purchasing shares on intervals, as opposed to all at once.

For example, let's say you have $5,000 to invest. You put it all in stock A at $10 a share. At the end of year one, the stock is $5 a share. Well, you have lost $5,000. Ouch!

However, instead you choose to invest a fixed amount of money in stock A each month. If you invest the same amount each month, you will invest $833.33.

Since your stock is now $5 a share, down from $10 when you bought it, you still lost $5,000, right? Wrong. Under the second scenario, your average cost basis is $6.83 - not $10 a share - and you "only" lost 26.7 percent, as opposed to the 50 percent you lost under the first scenario!

Saving Money on Buy Orders

However, another thing to consider is the cost of purchasing a stock. Most brokerages charge between $7 - $10 per trade. So you would also be down about $80 - $100 in trading fees.

This is another reason to consider choosing a monthly dividend paying stock - if you choose to re-invest your dividends, you are automatically dollar cost averaging your position every single month! (Just make sure your stock is eligible for a DRIP account and ask your brokerage how to enroll in one).

What is the Investment for 2014?

What is the Investment for 2014?

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Find Stocks Which Increase Dividends Paid Each Year!

Another thing to consider is that companies can most certainly increase the amount of the dividend they pay each year. Companies often do this when business is good and they are earning solid cash flow from operations. It is a great way to reward shareholders and increase value.

If you can find great companies which consistently increase their dividend year-after-year, you can become rich easily.

EXAMPLE: Let's say you are 25 years old and you start off with $10,000 to invest. You earn 5 % yield on your stocks, which pay a monthly dividend. These stocks also increase their dividends by 10 % each year (for example $1 per share paid in dividends becomes $1.10, $1.21, etc.). You invest for a 20 year period. You don't add any more money to the account, and you choose to re-invest all of your dividends.

When you are 45-year-old, how much will your initial $10,000 be worth? $133,561.01. But it gets better. Remember in year 1, when you were earning 5 % or $500 a year in dividends? You are now making that each month! By year 20, you are now receiving $5,866.32 each year in dividends. You can choose to sell your stock or you can simply take your $488 monthly dividend and do what you please.

Do the math for yourself at Dividend Ladder.

The Power of Dividend Raises

Initial Investment
Yield
Yearly Dividend Increase
Value After 20 Years
$10,000
4 %
5 %
$47,091.97
$10,000
5 %
7 %
$78,290.02
$10,000
6 %
10 %
$153,338.18
This assumes you re-invest all dividends.

3 Stocks Which Have Increased Dividend for 50+ Years

Dividend growth investing is a smart long-term investment strategy. Amazingly, there are a handful of companies which have increased their dividend payout each year for at least 50 years.

Here are 5 companies which have raised their dividend for the longest amount of time, according to Dividend.com:

#1 Diebold, Inc. (DBD) - This stock has increased its dividend every single year for 60 years and currently yields 3.55 %.

#2 American States Water (AWR) - This stock has a 59-year history of dividend increases. Shares currently yield 2.90 %.

#3 Dover Corp. (DOV) - Dover Corp has raised its dividend for 58 years running. It currently yields 1.57 %.

#4 Northwest Natural Gas (NWN) - This energy company also has a 58-year history of raising its dividend. Shares currently yield 4.37 %.

#5 Procter & Gamble (PG) - Dividend growth now stands at 57 years. The annual payout for PG is $2.41, giving shares a 2.99 % yield.

How to Find the Best Dividend Stocks

Top 3 Stocks Which Pay Monthly Dividends

While there are many stocks out there which pay dividends each month, not all make great investments.

Here are my three current favorite picks:

#1 Prospect Capital (PSEC)

Prospect is a business development company (BDC). The company currently pays out a dividend of $1.32 ($.11 a month). Prospect has a current dividend yield of 12.1 %. A $10,000 investment in Prospect Capital would amount to approximately $110 a month in dividend income.

#2 Vanguard Natural Resources (VNR)

Vanguard focuses on the acquisition and development of mature, long-lived natural gas and oil properties in the United States. The company currently pays out a dividend of $.207 per month. Based on its current share price, VNR yields 8.40 percent. Currently, a $10,000 investment in Vanguard would amount to approximately $70.64 a month.

#3 Realty Income Corp. (O)

Realty Income Corp. is a real estate investment trust which invests in the real estate markets of the United States. The company is known as "the monthly dividend company" as the company boasts a 44 year history of "providing dependable monthly income" to shareholders. Realty Income currently pays $2.19 a year in dividends or $.1825 a month. Based on the current share price, the stock yields 5.9 %.

PLEASE NOTE: This is not an individual investment recommendation and I am not a registered broker or investment adviser. This post is meant for informational purposes only. Please do your own due diligence before investing.

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    • gajanis786 profile image

      gajanis786 3 years ago

      Very nice and informative hub. Keep it up. Thanks.