Monthly dividend stocks: a checklist (not a list of picks)
To choose a monthly dividend stock, judge the payout, not the schedule. Most monthly payers are REITs, funds, trusts and lenders that pay out nearly everything they earn. Check that the payout is covered, where the money really comes from, and what happens to the share price over time.
The short answer
A monthly schedule tells you how often you're paid. It tells you nothing about whether the payment will last.
So skip the "best monthly dividend stocks" lists. Most of them rank by yield, and the highest yields are often the ones about to be cut. Run each candidate through the checklist below instead.
There are no tickers on this page, on purpose. Every company or fund you find should pass the checks on its own numbers. For the basics, see dividend investing explained.
Know what kind of payer it is
Monthly payers mostly fall into a few groups. Each one needs a different coverage check.
| Kind | What it does | Check coverage with |
|---|---|---|
| REIT (real estate trust) | Owns property, collects rent | FFO (funds from operations) |
| Business development company | Lends to smaller companies | Net investment income |
| Closed-end fund | A fund with a fixed number of shares | Income vs payout, and NAV |
| Monthly-paying ETF | A fund that trades all day | What the payout is made of |
| Canadian REIT or income trust | Property or business income | FFO or cash flow, and return of capital |
| Ordinary company | Sells goods or services | Earnings and free cash flow |
Earnings per share is the wrong yardstick for a REIT. Property gets written down on paper every year (depreciation), which pushes accounting profit far below the cash the REIT actually makes. That's why REITs use FFO.
The checklist
1. Is the payout covered?
Divide the yearly payout by the right measure from the table. Over 100% means it pays more than it brings in. The dividend payout ratio calculator handles earnings, free cash flow and FFO. See Payout ratio.
2. How much is return of capital?
Some funds pay you partly with your own money back. That's Return of capital. It isn't always bad, but a fund that pays mostly from capital is shrinking itself to keep the check the same. The fund's tax notices show the split.
3. Is the NAV or book value falling?
NAV is what a fund's holdings are worth per share. If the payout stays flat while NAV slides year after year, you're being paid with the fund's own value. That's NAV erosion.
4. How much debt is there?
REITs and lenders borrow a lot. When interest rates rise, their costs rise. Check how much debt comes due in the next two years and at what rate.
5. Has it cut before?
Look at ten years of payments. A history of cuts in hard times tells you what to expect in the next one.
6. Is the yield far above its peers?
Compare it with similar REITs or funds, not with the whole market. A yield far above its peers usually means the price fell because the market expects a cut. See dividend trap warning signs.
7. Can you trade it cheaply?
Check the bid-ask spread and daily volume. A thin market costs you on every buy and sell.
8. How will it be taxed?
In the US, REIT payouts are often not qualified dividends, so much of them can be taxed at your regular rate. Fund payouts can mix income, capital gains and return of capital. In Canada, REIT and trust payouts can include return of capital, which lowers your adjusted cost base in a taxable account. A TFSA or RRSP shelters the tax, though not the risk of a cut.
A worked example: the monthly check that shrank
Here's a made-up REIT, Lakeview Residential (hypothetical, not a trade idea). It trades at $20 and pays $0.15 a month, so $1.80 a year. That's a 9% yield. You buy 500 shares, $10,000.
It fails check 1 before you even buy:
| Check | Lakeview | Note |
|---|---|---|
| Yearly payout per share | $1.80 | $0.15 × 12 |
| FFO per share | $1.50 | The cash it actually makes |
| Payout vs FFO | 120% | $1.80 ÷ $1.50 |
| Shortfall per share | −$0.30 | Paid from debt or new shares |
You collect a full year of payments. Then Lakeview cuts to $0.10 a month and the price falls to $14.
| Line | Amount |
|---|---|
| Bought 500 shares at $20 | $10,000 |
| 12 monthly payments (500 × $0.15 × 12) | +$900 |
| Shares now worth (500 × $14) | $7,000 |
| Change in share value | −$3,000 |
| Net result | −$2,100 |
Check it the other way: $7,000 plus $900 is $7,900. From $10,000, that's −$2,100.
Twelve checks felt great. The first check on the list would have flagged it: the payout was 120% of FFO. And after the cut, the new payout is $1.20 a year on a $14 price, a yield of about 8.6%. It can still top a "monthly dividend" list.
Where monthly payers fit next to options
Many monthly payers are REITs and funds with modest price swings and thin options markets. If you plan to sell covered calls, check that options exist, that the spreads are tight, and how the monthly ex-dates line up with your expiries. See the wheel strategy.
For whether monthly payments are worth choosing at all, read monthly vs quarterly dividends.
Questions
How do I choose monthly dividend stocks?
Start with what kind of payer it is, then check coverage with the right measure: FFO for REITs, net investment income for lenders, earnings and free cash flow for companies. Then check return of capital, NAV, debt, cut history and taxes.
Are monthly dividend stocks safe?
No more than any other stock. Many monthly payers pay out most of what they earn, which leaves less room for a bad year. Check whether the payout is covered.
Why don't you list the best monthly dividend stocks?
Because a list ranked by yield pushes you toward the payouts most likely to be cut. A checklist works on any candidate you find, and it doesn't go out of date.
Is return of capital bad?
Not always. But if a fund pays mostly from capital while its NAV keeps falling, it's handing back your own money and shrinking.
Follow along