When it comes to dividends, there are two main types: monthly and quarterly. So, what are the differences between monthly vs quarterly dividends? Should you invest in stocks that pay monthly or quarterly dividends?
That depends on a few factors, including your investment goals and how long you plan to hold onto the stock. In this article, we'll discuss the pros and cons of each type of dividend so that you can make the best decision for your portfolio.
What are monthly dividends?
When attempting to understand monthly dividends, it's best first to understand what a dividend is. A dividend is a portion of a company's earnings that are distributed to shareholders.
Therefore a monthly dividend is a dividend that is paid out once a month. This does not change the total amount of money received when looking at it from a yearly perspective, but there are some pros and cons to receiving it in smaller, more frequent payments.
Advantages of monthly dividends
One advantage of monthly dividends is that you can reinvest them immediately. This is a great way to compound your returns, as you're essentially reinvesting your dividends and earning more money on top of your initial investment.
Another advantage of monthly dividends is that you can use the money to cover monthly expenses. This can be helpful if you're retired and relying on your dividends as income. Having a consistent monthly payment can help with budgeting and cash flow planning.
Bill payments typically arrive every month, so having your dividends coincide with those can be helpful. Lastly, monthly dividend payments can help keep you motivated.
If delayed gratification is difficult for you, seeing those monthly payments can help keep you on track. Small motivators might work better for some people.
Waiting for every quarter can seem like an entirety and discourage consistent investing behaviors.
Disadvantages of monthly dividends
The main disadvantage of monthly dividends is that they can cause some investors to check their portfolios frequently. This is because you're more likely to see fluctuations in your account balance when you're checking it monthly instead of quarterly.
If you frequently check your stocks, your chances of making ill-intended trades go up. Smaller dividend amounts that come in more regularly might be considered discretionary income.
It can be tempting to spend this money since it's not as significant as one large quarterly payment. This can be a disadvantage for some people that enjoy shopping or have trouble saving money.
Finally, monthly dividends can complicate tax planning. When you receive your dividend payments all at once, it's easier to plan for any taxes that might be owed. With monthly payments, you'll need to account for monthly taxes, which can be more challenging to keep track of.
What are quarterly dividends?
Quarterly dividends are, as the name implies, dividend payments that come once every quarter. Typically, companies will declare and pay dividends on a set schedule.
For example, a company might declare its dividend in January and pay it out in March. The year is separated into two four quarters, each with three months.
Advantages of quarterly dividends
The most significant advantage for companies that pay quarterly dividends is that they can plan their distributions more accordingly. This gives the company more of an idea of how much cash it will have on hand and can help with budgeting.
For example, if a product launch is coming up, the company might want to hold off on paying a dividend to have more cash on hand for marketing expenses.
Another advantage of quarterly dividends is that shareholders don't need to worry about taxes as much. Since the payments come all at once, you can plan for any taxes that might be owed on the dividend income.
This is opposed to monthly dividends, where taxes must be accounted for each month, as stated earlier. Of course, if you are investing in a tax-efficient manner, this might not be as big of an advantage.
Lastly, quarterly dividends can help keep shareholders patient. This is because they're waiting for a dividend that can keep vested interest longer than the option of receiving the monthly payment and moving on.
Disadvantages of quarterly dividends
Many of the disadvantages of quarterly dividends come from shareholders waiting long periods to receive payments. This can be difficult for those who rely on their dividends as income, as there might not be as much money.
If you only need a bit of extra money to pay off the month's credit card bills, you might accept the interest payments as you wait until the quarterly dividend comes in. Another problem that quarterly dividends present is that sometimes, companies will unexpectedly omit their dividend payments.
This is often done during difficult financial times and can leave shareholders feeling angry and betrayed. Imagine waiting for weeks or months to finally receive your dividend, only to find out that the company has decided not to pay it out.
This can be a real blow, especially if you count on that money. Finally, when it comes to quarterly dividends, you might miss out on potential compounding growth.
This is because the money isn't reinvested into the stock until the next dividend payout, which could be several months later. This can slow down the growth of your investment, and it might not be ideal if you're trying to build wealth over the long term.
Are monthly dividends better than quarterly?
Yes and no. Yes, they are better for those that rely on their dividends as income. For others, the answer is no. Quarterly dividends can help keep shareholders patient and can present less of a tax burden. There's no easy answer, and it depends on your circumstances.
Is a monthly dividend good?
As long as the dividend is sustainable and the amount is sufficient to your expectations, then yes, a monthly dividend is good. Having passive income every month is always a good thing. Whether you need it for monthly income or want to reinvest immediately, a monthly dividend is good.
Should you buy monthly or quarterly dividend stocks?
This can be difficult to answer as everyone has different financial needs and goals. Personal psychology and what works best for you might be the ultimate deciding factors.
The truth is, if you buy and hold multiple quarterly dividend stocks, there's a fair chance you will receive at least one monthly dividend from them. So, it might not be as big of a difference as you think. In the end, it depends on your unique circumstances.
Quarterly dividends can be a great way to earn extra income from your investments. However, monthly payouts can also be advantageous, especially if you need more regular income. When deciding which is better for you, consider your needs and preferences.
If you don't mind waiting a bit longer for payments, then quarterly dividends might be the way to go. However, monthly dividends could be a better option if you need more regular income. Ultimately, it's up to you to decide what works best for your situation.
Dividends are distributed on a set schedule deemed by a company's board, with most companies paying dividends quarterly. Monthly dividends are not as common, but they have a few advantages. You can not select which payout frequency you prefer, but you can create a portfolio that provides income each month.
For example, if ABC company pays dividends in January, April, July, and October, you can own DEF company that pays dividends in February, May, August, and November. And if GHI company were to pay in March, June, September, and December, you could also own shares in this company. By doing this, you would receive a dividend every month.
As you can see, you can still create an income portfolio with monthly payouts without holding any individual company with a monthly payout schedule. If monthly payments aren't as important to you, but stability is, consider investing in companies with a long history of dividend payments.
These companies are usually large and well-established, with a long runway of success ahead of them. Remember that dividends are just one factor to consider when making an investment decision. Review the company's financial statements, management team, and business model before investing.