Monthly dividends. The idea sounds very appealing. While some stocks pay dividends on a monthly basis, I’m turned off by some.
Monthly payers have both advantages and disadvantages. But is there a way to get the benefits of both monthly and quarterly paying stocks?
3 Advantages of Monthly Dividends
Some reasons why monthly income is appealing:
(1) Frequency
Getting paid 12 times a year is better than 4.
Putting aside the actual amount and return on investment you receive, I would like to get paid sooner.
(2) Optionality
A monthly income stream can provide options. Security to cover living expenses? Yes, please!
Alternatively, dividends can be reinvested to acquire additional shares. Keep those dividends growing!
(3) Motivation
Receiving a dividend feels good. It feels really good. By investing your money, it’s hard at work.
Additionally, a dividend is a paycheck for almost doing nothing. Of course, you’re assuming a piece of ownership – and risk – in the underlying companies you invest in.
3 Disadvantages of Monthly Dividends
These are considerations based on my needs at this time; you might find some of these benefits or view them differently.
(1) Taxes
Generally, an individual will be taxed at his or her ordinary income tax rate. In comparison, quarterly or longer paying income sources will typically enjoy a lower tax rate.
Despite taxes, utilizing different account types can mitigate some of the impacts.
(2) Over-Dependency & Noise
Over-reliance on monthly payers needs to be balanced. Understandably, if you require the monthly income for retirement or another purpose, then it makes sense to utilize the monthly income.
For some, myself included at times, you might spend more time managing and/or considering what to do with a monthly payer. As it happens 12 times a year versus a quarterly payer only occurring 4 times a year, you have fewer decisions to make.
Also, if you’re not receiving payment until 3 months from today, you might be less tempted to spend or allocate that payment.
Nonetheless, I’d still prefer to get paid more frequently!
(3) Limited Options & Sector Diversification
In the US, most dividend-paying companies pay shareholders on a quarterly basis.
If you’re looking for monthly payers, you’ll likely find a large number of real estate-related payers (REITs, for example) among other sectors. Monthly payers are not as well represented across as many sectors vs. quarterly dividend payers.
For this exercise, I wanted to focus on equities. Clearly, a large number of other options for income do exist though.
Balanced Dividends Passive Income Engine – Existing Tools
I attempted to identify dividend payers that would meet my unique requirements:
- Diversification
- Opportunity for dividend growth & stability
- Potential tax efficiency
- Motivation to keep me engaged
To meet these objectives, I quickly reviewed the existing tools and services that I’ve been using.
Overall, I’m a very big fan of all these platforms/services and continue to use them. These tools do serve as a certain piece of the Balanced Dividends Passive Income Engine; however, when used alone, they might not meet all the above objectives.
Vanguard
Vanguard offers a large variety of low-cost mutual funds and ETFs. The bulk of my net worth continues to remain with Vanguard.
However, based on my objectives, Vanguard does not provide me the opportunity to customize my target portfolio.
Fundrise
Fundrise is one of my favorite investment platforms. Although not containing a significant portion of my net worth, I continue to allocate additional capital.
Additionally, Fundrise primarily pays on a quarterly basis. Real estate continues to provide a great return for my particular needs. But most real estate is not as tax-efficient based on the method of investment that I want to utilize here.
Nonetheless, REITs do play a key part in my strategy, but I’m already heavily invested in this area and looking for additional diversification.
Related: Fundrise Passive Income Review: 12-Month Update
Robinhood
Robinhood offers zero minimum balances and free trading; I continue to utilize the free basic version.
Despite its terrific platform, Robinhood lacks the ability to purchase fractional shares. In order to create substantial monthly income with the criteria outlined above, one would need a relatively significant amount of capital allocated to a particular security.
Although users can create a diversified portfolio via funds and ETFs, I want diversification via individual names.
Overall, the tools mentioned above are helpful and will continue to be part of my investment strategy. However, I needed something else; I found it with M1 Finance.
New for Balanced Dividends – M1 Finance
Here’s a great review of M1 Finance by Glen over at Dividend Portfolio; I’ll also look to do a further review of my portfolio soon.
For now, just know that M1 Finance users can create custom portfolios from scratch. Users can also select from existing portfolios. M1 refers to each portfolio as a pie, where each holding – whether a stock, bond, ETF, and/or mutual fund – is a slice.
Because some of the pre-made pies cover different strategies (income, growth, hedge funds, etc.), I almost selected an existing strategy. But I wanted to create my own custom pie or portfolio with a selection of individual names to meet the above objectives.
Constructing the Monthly Balanced Dividends Portfolio
Here is the portfolio I created and initially invested in across 92 individual securities. As a result, I organized the portfolio into four groups composed of various dividend-paying stocks:
- (A) Group
- (B) Group
- (C) Group
- (D) Group
Despite the scope, many of these names have been on my various watchlists for some time.
Related: “What Is This Crap?” Clean Up Your Stock Watchlist
(A) Group
Summary
- 22 total individual names =
- 18 quarterly payers +
- 3 WTF? (when/will they fund?) payers +
- 1 semi-annually payer
Payment Frequency Analysis
- 7 payers in January, April, July, and October
- 7 payers in March, June, September, and December
- 4 payers in February, May, August, and November
- 4 others
(B) Group
Summary
- 22 total individual names =
- 20 quarterly payers +
- 1 WTF? (will/when they fund?) payers +
- 1 semi-annually payer
Payment Frequency Analysis
- 10 payers in March, June, September, and December
- 5 payers in February, May, August, and November
- 4 payers in January, April, July, and October
- 3 others
(C) Group
Summary
- 22 total individual names =
- 18 quarterly payers +
- 4 WTF? (when/will they fund?) payers
Payment Frequency Analysis
- 14 payers in March, June, September, and December
- 3 payers in January, April, July, and October
- 1 payer in February, May, August, and November
- 4 others
(D) Group
Summary
- 26 total individual names =
- 18 quarterly payers +
- 4 WTF? (when/will they fund?) payers +
- 4 semi-annually payers
Payment Frequency Analysis
- 8 payers in March, June, September, and December
- 5 payers in February, May, August, and November
- 4 payers in January, April, July, and October
- 9 others
Combined Portfolio Highlights – Quick Recap
92 individual names
74 quarterly payers (~80% of all names)
- 39 in March, June, September, and December
- 18 in January, April, June, and September
- 15 in February, May, August, and November
6 semi-annually and 12 WTF? (when/will they fund?) payers (~20% of all names)
As of this writing, my allocation and weighting with these names have an average dividend yield of 3.912%.
In a future post, I will go into further details about the percentages and allocations of each holding.
Other Observations & Thoughts
Methods
To get to this list, I reviewed the dividend history of each individual stock across approximately 150 names.
I then reviewed the dividend frequency and overall payout ratio to identify both quality names as well as a history of reoccurring dividends.
Clearly, many names on this list are not dividend aristocrats. I attempted to capture some higher-yielding names for additional balance.
Potential Adjustments
I might have difficulty watching 92 names closely. Because of this, the items listed in the initial portfolio might get slightly modified based on the WTF? (when/will they fund?) items noted below.
Most of these names are US holdings that do not always have a set dividend frequency.
But I want to emphasize that I still believe these names are worthwhile holding, as I only intended to utilize a limited number of securities for this particular portion of my portfolio.
If I were to remove approximately 12 WTF? (when/will they fund?) holdings, I would likely allocate them across my other existing holdings.
Overall, the number of payers by frequency provides income diversification.
Surprises
I was actually surprised by how many names do payout in the first or second month of each quarter. Most funds seem to still pay out distributions to investors in the third month of each quarter.
Oddly, a few pay on a quarterly basis but are slightly off schedule by a month or two.
Interestingly, I also did not previously consider the number of Canadian financial services names as a source of dividends to balance the US names:
Beginning (Limited) Scope
At this time, my M1 Finance portfolio contains less than $1000. However, with the great features of the platform, I’m now able to gain diversification, customization, and an enjoyable investment experience.
In the coming days, I intend to evaluate my current weighting and monitor the platform’s functions to see how the dynamic rebalancing feature works.
Wrapping It Up & Next Steps
Going forward, I intend to utilize Robinhood but likely for purchasing individual securities. M1 Finance does offer this capability; however, the customization and diversification opportunities with the fractional shares and the automatic rebalancing is beneficial for my respective investment needs.
The goal will be to continue to contribute to the M1 Finance account gradually over time and begin to receive a monthly stream of dividends across a diversified portfolio.
Combined with the other income streams of the balanced dividends passive income engine plus my new expanded focus on various side hustles, I am hopeful that the passive income will continue to grow.
Looking Back and – More Importantly – Ahead
Certainly, greater reflection on personal fitness and well-being has also enabled me to gain some additional appreciation on personal finance. As a result, all these areas are important for me to consider. It’s critical to be mindful in order to not only find but attempt to maintain a balance in different areas of my life.
Overall, I don’t know what’s next; I don’t know what will happen, but I do know I’m excited and working hard to prepare to define what I hope the future will become.
As always, thank you so much for reading and for your continued support.
Readers, what tools and methods are you currently utilizing or considering to construct your passive income engine? Do you utilize any of these names in your portfolio? What other recommendations or ideas would you consider?
Related
Passive Income Engine: Building a Balanced Dividends Portfolio
How We Got to Averaging $1,000 a Month in Passive Income
Side Hustling: The Fruition of (Potential) Frustration
Our favorite free financial tool is Personal Capital. We use it to track our net worth, manage our spending & savings, and to monitor our investments. It’s simple and free to use.
Nice article, covering many basis, but would like to add one (although I may have missed it): When to stop riding a horse. Years ago had a high flyer with good value appreciation and a killer dividend. Luckily took the profits off the table but kept a position to continue a good thing with a portion of the original investment. Ouch, the company tanked and of course the dividend stream stopped. A formal review strategy, say every quarter, would have helped to insure damage was less. Ah, hindsight is such a wonderful thing!
Hi – that’s a good point. While “buy and hold” is a notable, desirable strategy, it’s important to be mindful of overall performance – especially if an individual security (vs. a mutual or index fund, etc.). – Mike
Hi – great article and great insights into the world of Dividend Investing. I would love to see the breakdown of your M1 portfolio to mirror a similar strategy for my needs. Could you please share the pie you made containing the 4 groups? You can provide a link to the M1 website which will show the breakdown- I would be very interested in seeing this. Thanks!
Hi Bob – glad you enjoyed the post.
I’ll look to share the pie via the M1 site. For transparency, I recently liquidated a good portion of my original allocation, but I still have the pie. The decision to liquidate had nothing to do with M1 or the Pie, but rather personal investment needs at this time.
Thanks again for reading. – Mike