Income investors have many reasons to love dividend stocks. Most dividend stocks pay out quarterly or annually giving investors the assurance of supplemental income to offset planned expenses. For example, assume a company with a stock price of $50 pays a quarterly dividend with an annual yield of 5%. Assuming the stock price (and therefore the dividend yield) stays constant, an investor who owns 500 shares would receive $312.50 every three months or $1250 per year.
50 x 500 = 25,000 x .05 = $1,250/4 = $312.50
Stocks of companies that pay regular dividends are considered to be safe stocks. Once a company commits to a dividend it will make every effort to continue issuing that dividend. Cutting or eliminating the dividend completely would be a signal that the company is having financial problems. Yet another reason to love dividend stocks is the benefit that comes from compounding growth if dividends are reinvested over time.
All of these benefits are enhanced when investors choose dividend stocks that pay monthly dividends. In fact, in the case of compounding, investors who reinvest monthly dividends will generally see their annual returns grow significantly. And, although dividend stocks, in general, are less volatile than non-dividend stocks, stocks that pay monthly dividends are generally even less volatile, which can be attractive to investors with a low-risk tolerance.
What companies pay out a monthly dividend? As you might expect, utility stocks are represented. These stocks commonly pay dividends and pay them monthly. Another kind of monthly dividend stock that you’ll see heavily represented in this presentation is a Real Estate Investment Trust (REIT). REIT’s collect rent every month. By law, they are required to pay out a minimum of 90% of their taxable income as dividends. Therefore, paying dividends monthly gives them better control of their tax liabilities.
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