- “Durability implies that the firm can take a financial punch in one year and come back swinging the next.” - Josh Peters.
- “Do you know the only thing that gives me pleasure? It's to see my dividends coming in.” - John D. Rockefeller.
- It’s that nimble approach to value creation that helps me “sleep well at night."
In my monthly newsletter (Forbes Real Estate Investor), I hand-pick a few REITs that pay monthly.
Remember that not all REITs pay monthly, most pay quarterly; however, regardless of frequency, the one metric that provides me with the most intelligence is consistency. As I analyze the numerous flavors and sizes of REITs (in the US), the most important piece of the news that I’m looking for is the commitment by the company to its shareholders - that speaks plainly that management is strongly committed to increasing the dividend that shareholders are counting on.
Whether monthly, quarterly, or annually, the dividend increase sends a message that the company's earnings stream can be relied upon and that the underlying business model is sustainable. In the Ultimate Dividend Playbook, author Josh Peters sums up the signal inherent with a stock that increases its dividend over time:
“Durability implies that the firm can take a financial punch in one year and come back swinging the next.”
But oftentimes, investors overlook the frequency of the dividend payment.
On one hand, I understand the oversight. After all, if a security pays an annual dividend of $2.00 per share, what difference does it make if it pays $2.00 per share once a year or $0.1667 per share 12 times a year? All else being equal, however, a more frequent dividend payer is better than a less frequent dividend payer. This is especially true if you reinvest dividends.
I’m not retired, and accordingly, most all of my dividend income is reinvested; however, many income investors are looking for monthly dividend payments to support their income during retirement.
By investing in REITs that pay monthly, you're able to better match fund your living expenses and create a more disciplined approach to saving and investing. Many retirees (and even some college students) like receiving monthly rewards (in the form of dividends), as they provide the flexibility of paying a household bills, enjoying rounds of golf (for me it's golf balls), or eating out at a favorite restaurant (The Cheesecake Factory).
Also, it’s possible that a monthly dividend payment can bridge the gap when an emergency arises. What if my wife tells me that we have to shell out $5,000 for the kid’s braces (that actually happened last week) and all I have are stocks that pay annually. I may have to sell out of a good stock before its payoff, and that could cost me precious earnings power.
The point is, the more frequent the dividend, the less impact dividends have on buy and sell decisions.
My classic reason to own monthly dividend stocks is for the power of compounding. In other words, I simply enjoy putting the money back to work - like owning a free share machine. Many pre-retirement investors want monthly dividend stocks for their IRAs for faster compounding. The longer you hold your shares, the higher the yield you will receive on your original investment and the greater the impact of the "cumulative dividend effect."
That "cumulative dividend effect" means that the longer you own your shares, the less remaining original principal you have invested in the company. These combined benefits are only available with companies which pay reliable dividends that are regularly increased over time. John D. Rockefeller once said:
“Do you know the only thing that gives me pleasure? It's to see my dividends coming in.”