Investments that pay a dividend every month aren’t a hard sell. After all, who doesn’t want a little extra monthly income to help tackle the monthly bills?
Sadly, that’s where too many investors believe the benefits end. Indeed, many still think that buying a security paying $0.10 per share in dividends a dozen times a year gives them the same long-term payoff as buying one that pays $1.20 in dividends annually.
This Stock Pattern Has Been Making Ordinary Investors Rich
That idea couldn’t be more short-sided. Beyond the convenient payouts that monthly dividend stocks and funds provide, these frequent dividend payers offer much more than most people realize when it comes to building wealth.
Here are few excellent reasons to love monthly dividend payers:
1. Higher Frequency Leads To Faster Growth
If you choose to wisely reinvest your dividends (assuming you don’t need to live on them right away), you will ultimately make more money and build your wealth faster with a monthly dividend payer than with an annual dividend payer.
Let’s say I invest $100,000 in two securities that each paid a 7% annual dividend yield. One pays dividends monthly and the other pays once annually. For simplicity, let’s also say these investments don’t change in value over time (i.e. no capital gains or losses) and that I reinvest my dividends as soon as they’re paid out.
After one year, the annual payer would be worth $107,000 (my original $100,000 investment plus $7,000 in dividends) at the end of the year. By comparison, the monthly payer would grow to $107,229 as long as I reinvested my dividends every month and let them compound. That’s $229 more growth than the annual payer in just one year.
As I continue to reinvest my dividends and let them compound over time, the rewards of the monthly payer only get better. After 10 years, the monthly payer in this example would be worth $4,251 more than the annual payer.
The key here is that the more often you reinvest your dividends, the more time they have to compound and grow.
2. Less Market Risk
When you buy an annual payer, you only have one day a year to buy additional shares through a dividend reinvestment program. But what if the stock hits an all-time high price on that day? You could get unlucky and reinvest in shares at a high price -- and get stuck with a low dividend yield.
A monthly payer on the other hand lets you reinvest your dividends to buy shares 12 times a year, spreading out your market risk in letting you buy a few shares at a time. This gives you a greater possibility of buying shares when they’re cheaper, too, for higher potential returns if the security gains in value.
3. Peace Of Mind
When I buy dividend-paying stocks, I prefer to hold them for the long haul. But sometimes the unexpected happens. Maybe market conditions get too risky for a specific asset class. Maybe a company runs into trouble. Or maybe I suddenly need the cash for a personal emergency.
I face difficult and expensive choices if a stock I own pays dividends annually and I have an unexpected situation. For example, I'd hate to hold on to a stock for 11 months, only to have to sell it right before its payoff date and miss out on the dividend income. I'd also hate to hold on to a problem stock just for its dividend – who’d want their stock shares to fall $2 in price just to collect $1 in dividends?
In contrast, a monthly dividend payer gives me easier decisions and greater peace of mind. I don’t need to wait around as long for my dividend if I ever need to quickly get out of the investment. And I don’t have to worry about payoff dates or “missing out” on dividends as much.
While I'm still using dividend reinvestment as the growth engine toward building my retirement fund, I’ll eventually need to start living off the income from my portfolio.
When I reach that point, my monthly dividend payers will give me a convenient way to pay my bills every month. I might use monthly dividends to pay the final mortgage bills to pay off my home. I also might use them to pay my monthly electric bill, my monthly cable bill, and my monthly phone bill.
How To Choose A Monthly Dividend Payer
There are hundreds of monthly dividend-paying securities on the market, with more launching every day. Unfortunately, the vast majority of monthly dividend payers are fixed-income securities (i.e. bond funds), which are interest-rate sensitive and can lose value if interest rates go up.
Stocks and ETFs that pay a monthly dividend are less common, but may be the better choice as they are less exposed to interest-rate risk than bond funds.
I’m fond of monthly dividend payers as they help me grow my retirement fund faster while also helping me sleep better at night. And when I’m ready to stop reinvesting my dividends and start living off the income, they’ll be handy toward paying the bills every month.
P.S. In my premium newsletter, The Daily Paycheck, our income strategy is perfectly suited for monthly dividend payers. That's why we hold several monthly dividend payers in our portfolios. As a nice bonus, many of these carry annual dividend yields above 5%.
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This article originally appeared on Street Authority.