VICI - Why Monthly Dividend Stocks Are Overrated
2024-01-20 08:15:00 ET
Summary
- Most dividend stocks pay on a quarterly basis.
- However, some investors prefer monthly dividends.
- This is not rational and I explain why.
Most dividend stocks pay you on a quarterly basis. This includes big names like Coca-Cola ( KO ), McDonald's ( MCD ), and even Microsoft ( MFST ).
But there is a minority of dividend stocks that pay you on a monthly basis, and it seems that some dividend investors are willing to pay a large premium to get more frequent dividend payments. Some will go as far as to only invest in stocks that pay monthly dividends, thinking that this is a major advantage that will lead to greater returns over time.
I believe that this is a mistake.
On the contrary, I think that quarterly dividend payments are better for the investor, and there are good reasons why most companies decide to pay quarterly rather than monthly.
Here are 3 of them:
Reason #1: Quarterly dividend payments save expenses
Monthly dividend payments lead to higher banking fees, administrative fees, accounting fees, and even legal fees.
It means that there will be 3x more payments, all of which need to be tracked properly, resulting in more expenses that could be avoided.
You need to remember here that as a shareholder, you are the person who is ultimately paying for all these expenses.
Reason #2: Monthly dividends lead to opportunity costs
There are also opportunity costs in paying a monthly dividend because it means that the company will retain the cash for a shorter period of time.
By paying quarterly, the company can reinvest its cash for two more months and hopefully add some incremental return in the process. It's not significant, but every little bit helps.
Reason #3: Quarterly dividends provide more flexibility
Finally, and perhaps most importantly, it helps with cash flow management to pay less frequently.
One of our readers just recently made the following comment:
"A company's receivables could be paid at different levels month to month whereby one month's dividend coverage would be high and the next low or even requiring a company to draw on a revolver to pay in an extreme case until funds are received from tenants. This of course would result in the corporation paying interest to make a dividend payment."
The lack of flexibility may lead to missed investment opportunities if the company doesn't have enough cash on hand or if it needs to hold larger cash reserves to make monthly dividend payments, and in some cases, it could even force a REIT to borrow temporarily to make its dividend payment.
It just hurts the liquidity of the company.
The costs outweigh the benefits
Companies typically prefer to pay quarterly rather than monthly because it leads to cost savings, reduces opportunity costs, and leads to better cash flow management.
Despite that, investors will often be willing to pay a premium to get paid every month.
But what's really the benefit of that?
Even if you are a retiree who needs monthly income, is there much value in getting paid every month versus every three months?
A quarterly payment only means that you will get a 3x larger payment for three months at a time. You can then divide it up for each month.
So there is really not much of a benefit. It is more psychological than anything. You want a monthly payment because that's what you are used to getting from your day-to-day job, but as an investor, you should want your company to perform as well as possible to maximize long-term returns, and quarterly dividends are generally better to achieve that.
The exception
There is one exception, and that's if the company in question is actively pursuing M&A deals to grow and a monthly dividend helps it achieve a higher multiple, which lowers its cost of capital. In that case, paying a monthly dividend could be worthwhile.
There are many such examples in the REIT ( VNQ ), BDC ( BIZD ), and MLP ( AMLP ) sectors. These are capital-intensive businesses that will often issue new equity to then make new investments. Therefore, their cost of equity is very important to their growth prospects, and if paying a monthly dividend helps the market sentiment of their stock, then it is probably a net positive for the company.
Realty Income ( O ) has commonly traded at a premium relative to its peers, and one reason for that may be its monthly dividend payments. Its peers, including NNN REIT ( NNN ) and VICI Properties ( VICI ), pay quarterly instead.
Takeaway
Don't just buy something because it pays monthly dividends.
It really shouldn't be such a big deal, even if you are an income investor.
On the contrary, there are many downsides to paying monthly dividends and this explains why most companies pay quarterly instead.
For further details see:
Why Monthly Dividend Stocks Are Overrated