The idea of living off dividend income in retirement attracts a lot of attention, especially in times of low interest rates. Monthly dividend payments can provide significant support. They are a great addition to Social Security benefits or a pension for retirees. By developing a well-balanced and diversified portfolio, investors can secure their post-work income.
Many high-quality securities pay dividends once a quarter, biannually, or even once a year. Wall Street also has many monthly dividend stocks that provide the more consistent cash flow you need during retirement.
In this article, we will learn about stocks that pay monthly dividends and review their benefits and risks. We’ll also discuss how to invest in them to diversify your investment portfolio.
Overview of Monthly Dividend Stocks
Dividend-paying stocks make a lot of sense for retirees. But since many dividend stocks pay out quarterly, it may make the earnings stream dry up during the months in between. Throughout retirement, you will need a steady cash flow to cover expenses.
Monthly dividend stocks can be a solution, as they provide a more consistent income through monthly dividend payouts. They also have higher yields than bonds, and their increasing dividends can help protect against rising inflation. Well-selected dividend stocks can build a healthy, growing income stream and desirable portfolio growth in the long run.
Benefits of Stocks That Pay Monthly Dividends
Investing some of your portfolio in monthly dividend stocks has various benefits:
- High liquidity: A liquid investment is one that you can easily convert to cash. Since many retirees want to receive a consistent cash flow, there is always some demand for monthly dividend stocks. These dividend stocks tend to have high trading volume and strong liquidity.
- Steady cash flow: More frequent and consistent dividends generate a steady cash flow. You will get the money in your hands faster, and you will benefit from more consistent payments that can help cover your monthly expenses.
- Portfolio diversification: Unbalanced portfolios that are built around only a few securities can create a lot of risks. It can cause financial losses during market volatility. A healthy investment mix can add stability to your portfolio. Stocks that pay monthly dividends can be found in a variety of industries and funds.
- Faster reinvestment: Reinvestment of monthly dividends is another way to boost the value of your portfolio over time through compounding interest. More shares of the same or other undervalued securities can be purchased using the received dividends. Reinvesting will help further grow your wealth long term and ensure dividend growth.
Risks of Investing in Monthly Dividend Stocks
There are many risks in the market that may impact dividend payouts. Economic downturns, supply chain issues, currency fluctuations, and so on can impact companies’ results. If the business model gets disrupted, it can negatively impact companies’ financials. It creates a risk that the companies may stop paying dividends.
A good example of such a disruption was the shift to e-commerce during the 2020 pandemic. Instead of going to a local store, many people preferred online shopping. You’ll want to take note of these kinds of macroeconomic headwinds when choosing investments.
Another thing dividend investors should watch out for are value traps. Value traps are securities that are trading at a low price level with a high yield and thus look like a good buying opportunity, when in reality they may have no future. These companies may not have a competitive edge and have a declining performance. High-yield stocks may be tempting to buy, but investors need to be careful and do their due diligence before deciding whether it is worth the risk.
To address the risks, an investment portfolio needs to be maintained with care and has to adapt to the changing environment.
Where to Find Reliable Stocks That Pay Monthly Dividends
There are many security types that pay dividends each month. You can invest in individual stocks, ETFs, or mutual funds.
Investors can decide on the mix of investments — from well-known companies or Dividend Aristocrats to other various high-dividend-yield funds. Let’s review some of the different options.
Individual investors should be focused on developing cash flow that is not threatened by changes in the market.
There is a group of companies on the stock market called Dividend Aristocrats. These companies have an impressive track record; they are cash-generating S&P 500 companies with a market cap of at least $3 billion. Most importantly, they have been increasing their per-share annual dividends for at least 25 consecutive years, having managed to weather economic downturns for many years. It makes them a safe option for dividend investing.
One monthly Dividend Aristocrat is Realty Income Corporation (NYSE:O). It is a real estate investment trust company that generates revenue from leased real estate assets. It has a fairly low-risk business model, as its tenants are responsible for the operating expenses. As of March 2021, it has an annual dividend yield of 4.55% and a share price of $64.20.
Real Estate Investment Trusts (REITs)
There are many REITs that pay dividends every month. For example, Stag Industrial (NYSE:STAG) is a REIT company specializing in industrial properties across 39 states in the United States. As of March 2021, its shares deliver a 4.3% dividend yield at the share price of $34.20. Keep in mind, there are many more REITs stocks with higher dividend yield.
Business Development Companies (BDCs)
Many business development companies (BDCs) pay monthly dividends. BDCs are a special type of closed-end investment firm. They make debt and equity investments in small- and medium-sized corporations. For example, Prospect Capital Corporation (NASDAQ:PSEC) is a business development company that invests in middle-market businesses through debt and equity securities.
Closed-End Funds (CEFs)
Closed-end funds are professionally managed funds that build capital at time of their IPO and then invest it in various securities. This investment option can be found in different industries — such as health care, energy, or finance — so it can provide diversification in your portfolio.
CEFs are another investment type that often pays out monthly dividends and usually has high yields. With closed-end funds, you can expect to gain 5-10% returns and keep your risk at a low level.
Invest in Monthly Dividend Stocks
A lot of time and careful planning is required to build a stress-free retirement income. It is highly advisable to add monthly dividend payers to your portfolio and enhance your income stream. As a dividend investor, your monthly investment income can complement your Social Security and pension benefits to help you pay your bills and enjoy your post-work life.
Not everyone would like to spend their time on the research and maintenance of a retirement account. At the same time, your financial future depends on these small changes to the portfolio. Your retirement strategy needs care and maintenance.
Investors Alley will help you make good choices for your retirement. To learn what high-yield monthly dividend stocks to invest in, when to buy and when to sell, sign up for our Dividend Hunter Newsletter. It will help you actively manage a portfolio of dividend stocks while minimizing risks.