All things being equal, getting paid more frequently is certainly better, right? So, while most dividend stocks make quarterly payments to shareholders, there are a few hundred publicly traded companies that choose to pay monthly instead.

While not all monthly dividend stocks are great investment opportunities, there are two ways that monthly dividends can boost your income: the higher dividend yields that monthly payers tend to pay; and the mathematics of more frequent compounding. And here's what investors need to know about both.

Monthly dividend stocks tend to pay more

Monthly dividend stocks generally pay above-average dividend yields, and this is mainly due to the types of companies that choose to make monthly payments. Real estate investment trusts, or REITs, closed-end funds, business development companies (BDCs), and royalty trusts are just a few of the common types of stocks you'll find on the monthly dividend list. In fact, among the 283 stocks with market capitalizations greater than $250 million that pay monthly dividends, the median dividend yield is about 8% as of March 2023.

However, one word of caution is to watch out for dividend traps when searching for monthly dividend stocks. Mortgage REITs are one type of stocks that commonly pays monthly dividends and frequently falls into this category, as they pay very high yields. Right now, AGNC Investment (AGNC 0.84%) and ARMOUR Residential (ARR 1.77%) -- two popular mortgage REITs -- have dividend yields of 14% and 23%, respectively. However, they are prone to fluctuating earnings, dividend reductions, and total returns that often underperform the market despite their high payouts.

There certainly are some excellent companies that pay monthly dividends. Realty Income (O -0.25%) is an example. It's an equity real estate investment trust, or equity REIT, meaning that it owns physical real estate. And it has increased its dividend more than 100 times since listing on the NYSE in 1994. In fact, Realty Income has a trademark on the phrase "The Monthly Dividend Company." Stag Industrial (STAG -0.06%) and EPR Properties (EPR 0.35%) are two other examples of solid REITs that pay monthly dividends.

Monthly compounding can be an additional bonus

In addition to the generally higher dividend yields paid by monthly dividend stocks, there's also the mathematical advantage that comes with more frequent compounding.

Now, I don't want this to turn into a math lesson, but consider this example. Let's say you own 100 shares of a stock that trades for $100 per share and pays $4 in annual dividends in quarterly installments. Therefore, in the first quarter you'll get $1 per share, or $100 total, which you could reinvest to buy one more share. Now you own 101 total.

So, in the second quarter, you receive a $1 dividend on 101 shares, or $101. This allows you to buy slightly more than one share to add to your investment. And this is the basic idea behind dividend reinvestment. Dividends will be paid not only on your original shares, but on all of the shares your previous dividends have bought.

Mathematically speaking, your stock pays $4 per share with a $100 share price, so it has a 4% nominal dividend yield. However, if you reinvest all of your quarterly payments, the effective yield is about 4.06%.

If the dividends were paid in monthly installments instead, your investment would compound more frequently and your effective yield would be higher. In our example, if the stock paid the $4 dividend in $0.33 monthly increments instead of $1 per quarter, and you reinvested each one, your effective yield would be a little over 4.07%. This isn't a huge difference versus quarterly compounding, but over time it can add up to a significant amount of money.

If the mathematics here were a bit confusing, don't worry. The point is that monthly dividend reinvestment has a slight mathematical advantage over quarterly.

The bottom line

The short answer is yes, you can get more money from monthly dividend stocks. However, just like when buying any type of dividend stocks, it's important to focus on finding great businesses first and looking beyond the dividend. And if a dividend yield sounds too good to be true, it probably is.