The go-to figure for dividend investors is usually dividend yield. But this figure is simply the annualized dividend divided by the stock price, so it doesn't take into account the frequency of the dividend payment. Does a dividend being paid monthly, quarterly, or yearly make any difference? It can, and here's why.
From worst to best
By far, for most investors, the worst way for a dividend to be paid is yearly. Basically everything rides on that one single payment, which will be relatively large. If you are reinvesting dividends, that's probably not too problematic -- but if you are trying to live off of the income your portfolio creates, it is a nightmare. Essentially, you have to ration out the payment over the next 12 months. Similarly, semi-annual dividends -- paid once every six months -- can also create budgeting problems.
Image source: Getty Images.
But here's a big question: What happens if those infrequent dividends don't get paid? That's exactly what happened to Disney (DIS 0.07%) shareholders in 2020, when the coronavirus pandemic upended that company's business. The semi-annual dividend is expected to come back in 2024, but counting on an outsized dividend payment is a huge risk factor to consider when looking at an annual or semi-annual payer.
Quarterly dividends are a step in the right direction. This payment frequency means you'll collect four payments in a year, helping to spread out the income that dividend investors collect. If the dividend was to get cut, you'd be upset, but the hit wouldn't be quite as large given the smaller, more frequent payment schedule. And trying to spread a dividend check over three months is far easier than trying to spread an annual check over 12 months or a semi-annual payout over a six-month period.
That said, the best option for investors is probably a monthly dividend payment, like you'd collect from Realty Income (O 0.45%) or Agree Realty. The initial hit from a dividend cut would be relatively modest, and a monthly dividend is pretty much as close as you can get to replacing a paycheck, making managing your daily finances much easier.
Do you get more?
From a big-picture perspective, however, dividend frequency doesn't change how much money you are getting. As noted, dividend yield is a simple math problem, and it places all dividend payers on an even playing field because the dividend figure used is annualized. So Realty Income's 4.9% or so yield is the same as any other 4.9% yield. The convenience of being paid monthly is the biggest difference. It shouldn't be overlooked, but it shouldn't be the only factor you consider.
That said, there is a potential benefit to more frequent dividend payments if you reinvest the dividend. In this scenario, you wouldn't be living off of the income, but buying more shares with each dividend payment. The more frequent monthly dividend periods would allow investors to benefit from dollar-cost averaging the purchases, hopefully leading to a lower average purchase cost over time. The benefit versus quarterly purchases, however, probably won't end up being huge. Pitted against an annual dividend, or semi-annual as is common in Europe, quarterly and monthly dividend reinvestment are probably better, but a lot still depends on the vagaries of Mr. Market.
Convenience is the big win
At the end of the day, investors should probably pay more attention to company fundamentals and stock valuation than dividend frequency. However, there are some potentially modest and material benefits from collecting more frequent dividends. On the modest front, dividend reinvestment of monthly dividends could lead to a dollar-cost averaging benefit. On the material side, it is much easier to budget with monthly dividends if you are trying to live off of the dividends you collect. While dividend yield is a pretty simple mathematical equation, it doesn't take into account everything that dividend investors need to consider.
