What do you consider when looking to purchase a new dividend-paying security?
If you're like most income investors, you probably search out its yield or investigate whether it can maintain its dividend.
These are important criteria, but there's another trait that many investors overlook that is just as important: dividend frequency.
On one hand, I understand why it's often overlooked. After all, if a security pays an annual dividend of $1.20 per share, what difference does it make if it pays $1.20 per share once a year or $0.10 per share 12 times a year?
All else being equal, however, a more frequent dividend payer is better than a less frequent dividend payer... especially if you are reinvesting your dividends.
Earn More Income
The fact is if you reinvest your dividends as I do, you will ultimately make more money with a monthly dividend payer than an annual dividend payer.
To see what I mean, take a look at the chart below. It contrasts the growth of $100,000 invested in securities yielding 7%.
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One security makes monthly distributions while the other makes an annual distribution. In both cases, we'll assume you reinvested your dividends, and for simplicity's sake let's also assume that the securities neither appreciate nor depreciate over time.
As you can see, initially there isn't much difference between the two positions. After the first year, the monthly payer has a slight edge, valued at $107,229 versus the $107,000 value of the annual payer.
But as time goes on, the difference really widens. In fact, after just ten years, the monthly payer would be worth $4,251 more.
Put simply, the higher the frequency of your dividend payments, the faster the growth. That's one of the best things about monthly dividend payers. But it's not the only benefit that comes from investing in companies that pay you 12 dividends a year.
Less Market Risk
Think about this, with an annual distribution, you have just one day a year to buy additional shares via 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 a low yield.
But with a monthly dividend, you reinvest in shares 12 times a year, spreading out the market risk of your reinvested dividends.
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When I buy dividend-paying stocks, I intend 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.
So what if the stock I need to sell has a pending annual dividend? I'd hate to hold on to a stock for 11 months, only to have to sell it right before its payoff. I'd also hate to hold on to a problem stock just for its dividend. I don't want to lose $2 in share price just to collect $1 in dividends.
Investing decisions are hard enough. I don't need to make them any more difficult. The more frequent the dividend, the less impact distributions will have on your buy and sell decisions.
I use the Daily Paycheck strategy in my personal portfolio. As a Baby Boomer, I'm at the age where I need to continue to grow my retirement fund, and dividend reinvestment is a great growth engine. But in time, I'll need to rely on my portfolio for the income it generates.
Although I am getting closer to paying off my mortgage, there may be a couple of years when I will use my retirement income to pay my monthly mortgage bill. I could also use it to pay my electric bill, my cable bill, my phone bill.
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Monthly dividend payers are just a little more convenient when it comes to paying monthly bills.
For instance, one of the monthly dividend payers I hold in my Daily Paycheck portfolio is Reaves Utility Income Fund (NYSE: UTG). Right now, my shares of UTG payout roughly $54 a month.
Of course that's probably not quite enough to cover your monthly utility bills. But give it a few more years of dividend reinvestment and it just might.
There are hundreds of monthly dividend-paying securities for you to choose from, with more launching every day. I recently recommended one firm to subscribers that has paid 540 consecutive monthly dividends. That's 45 years straight.
All told, I am currently generating nearly $1,600 in income each month and my portfolio is 33% less risky than the S&P 500. The power of the Daily Paycheck Retirement Plan is undeniable, and now I'd like to help you achieve similar results and begin planning for retirement.
To learn how you can start your journey towards 365 dividend checks per year -- and how to get the name of one of the best monthly dividend payers on the market -- I invite you to check out my brand new presentation by clicking here.