The 2 Best Monthly Dividend Stocks [Free Bonus Strategy]

Monthly Dividend Stocks

If you ask any dividend stock investor how often they receive their dividends, they’d probably say quarterly.

That’s because most stocks pay their dividends every three months.

There is also a large group that pays out on a semi-annual basis.

What often gets overlooked are the monthly dividend stocks.

Stocks that send a paycheck your way every single month.  12 months a year.  120 months a decade.

They often get overlooked because few people worry about when their dividend gets paid.

If you plan on living off your investment dividends, it’s a good idea to add monthly dividend stocks to your portfolio.

What are Monthly Dividend Stocks?

Monthly dividend stocks are exactly what they sound like.  They’re stocks that pay out their dividend on a monthly basis.

Usually, a stock will pay out monthly dividends to avoid paying taxes.

Most of the time these are real estate investment trusts or REITs for short.  Because they’re able to pass on their taxes to the stockholders, it benefits them to pay out on a monthly basis.

Another common type of monthly dividend stocks is the closed-end fund or CEF.

CEFs are a pooled investment fund with a manager using that money to invest and oversee the portfolio.  Not all CEFs pay out a monthly dividend, but nearly all municipal bond CEFs do.

Municipal bond CEFs are funds comprised of, surprise surprise, municipal bonds.  The payments from the bond are passed on to the investors through monthly dividend payments.

Why Monthly Dividends instead of Quarterly?

This is a personal preference.  Some people don’t like going a month or two without some sort of cashflow coming in.

Remember, we’re thinking of living off these dividend payments at some point.  Having a reliable monthly income is pretty enticing.

If you are good at budgeting and can spread out your February dividend payments to cover March and April, that’s awesome!

What quarterly dividend income looks like

Sometimes it’s good to have a little extra cash flow coming in during those months in-between quarterly payers.  It makes budgeting that much easier.

What monthly dividend income looks like

If you’re early in your investing timeline, investing in monthly dividend stocks might not be the right choice.

You should be reinvesting dividends at this point to grow your snowball.  There shouldn’t be much concern about when your dividends come in.

But, the later in life you get, the more you start to rely on those dividends to pay the bills.  You could then start shifting your money over to monthly paying stocks.

Two Types of Monthly Dividend Stocks

We’ve touched on the two most common ones, but let’s look at them a little more in depth.

REITs

REITs are a great option for monthly dividend income

REITs are like a mutual fund.  They allow big and small investors to join real estate ventures.

These REITs can be investments in commercial buildings, hospitals, land, warehouses, shopping malls…all sorts of real estate.

The law requires REITs to have payout ratios of at least 90%.  This means that most of the money the trust earns gets paid out in dividends.

They’re a great choice for income investors, like ourselves, and should be included in your dividend portfolio.

Choosing a REIT is simple.  Follow the guidelines of the 7 Truths Strategy and invest in the top ranked REIT.

But, if you’re looking for a significant monthly income, it would take a large investment in those REITs which could put your portfolio out of balance.

This is where CEFs come in.

Closed-End Funds

CEFs are also like mutual funds.  People invest money into a fund that a manager then uses to build a portfolio.

A CEF can have all sorts of goals.  There are CEFs that invest only in technology stocks.  There are some that only invest in mining and precious metals.

You might be thinking, “this sounds a lot like a mutual fund?”  Well, they are similar except one key difference: CEFs are closed.

Closed meaning the fund raised money through an initial public offering or an IPO.  They sell a fixed number of shares to raise the initial capital.  It works like any new stock on the stock market.

Because there are only a select number of outstanding shares available, the closed-end fund operates like a stock on the stock market.  The price can go up and down throughout the day.

The price is based on supply and demand as well as the changing values of the securities the fund is holding.

Are They Safe?

Monthly dividend stocks are as safe as any other stock.  There is a risk that the price will go down.

But, if you hold the REIT for a long enough period of time, the odds of you coming out ahead are much better.

We’ll get to the CEF investing strategy next, but they’re even safer than other stocks.

I recommend investing in closed-end funds that deal strictly in municipal bonds.

Muni bonds are one of the most boring investments around, which is usually a good signal they’re safe.

Because they’re backed by a city or state, there is almost no risk the value will go to zero.  The city or state would have to go BANKRUPT for you to not get any money back.

This is perfect for an income investor, like ourselves.  The main goal with our monthly dividend stocks is to smooth out our investment income.

We want to cover up the holes that our quarterly stocks are missing throughout the year.

Another fantastic benefit of investing in muni bond CEFs is the income is tax-free!

Unlike the dividends from other stocks, the income you get from these CEFs isn’t touched by the IRS.

Monthly Dividend Stock Investing Strategy

The strategy for investing in REITs is the same as investing in any other stock.

Follow the 7 Truths of dividend investing.  Invest in the top recommended REIT after performing your screen.

Investing in Municipal Bond Closed-End Funds takes a little more work.

You’re going to want to sign-up for a free membership at CEFConnect.  This is one of the largest closed-end fund explorers out there.

After signing up for a membership, go to the Fund Screener.

Getting to the fund screener at CEFConnect

Click ‘Start New Search’

Start a new fund screening search

On the left, expand ‘Tax-Free Income’ and then click ‘Select All’

Select all the municipal fund CEFs that are available

Then, down at the bottom, click ‘View Funds’

View a list of all the municipal CEFs in CEF Connect

You’re then going to get a list of 150+ closed-end municipal bond funds.

Now we have to go about choosing the best ones.

The beauty of CEFs is they practically tell you when they’re undervalued.

With stocks, the P/E ratio is a decent indicator, but sometimes that ratio gets pushed higher based on future expectations.

Not so with CEFs.  Remember that CEFs are a collection of securities.  Those securities have a total value called the Net Asset Value or NAV.

The NAV, in basic terms, is what one stock is worth.

Say you had a $100 bill and sold 100 shares in that $100 dollar bill.  It’s safe to assume that the value of each share is $1.  That’s kind of how the closed-end fund works.

But, the price of that CEF doesn’t always reflect the NAV.  Sometimes the price can be higher than the NAV.  In that case, the CEF is trading at a premium.

If the price is lower than the NAV, it’s trading at a discount.

Power of the Discount

Just like when you’re shopping, we’re looking for the discounts.

In particular, the deep deep discounts.

In the fund screener, you’ll see a column with the header ‘Discount/Premium.’

CEFs can trade at a premium or at a discount of their NAV

Sort that column from lowest to highest.

Now you’re seeing the funds listed from the deep discount all the way to the high premium.

You don’t want to just buy the funds with the deepest discount, though.

Some funds regularly trade at a discount.  What we want to find are funds that are currently trading at a discount but usually have a price at or above their NAV.

Click on the most discounted fund on your list.

Then go to ‘Pricing Information’

You’ll see a graph showing the pricing information for that fund over the last year.  The x-axis showing whether it was trading at a discount or premium.

You can even expand the timeline to show the last five years.

You can see the pricing information for a CEF over a five year period

You want to find the funds that are trading at or near their deepest discount in a five-year period.  This is referred to as the relative discount.

The relative discount is the average discount over a certain period.  When we sorted the CEF screener, we were basing the sort on the absolute discount.

A quick way to look for those relative discounts is by focusing on the fund’s Z-score.

Closed-End Fund Z-Score

The the following formula determines a CEFs Z-score:

Z = (current discount – average discount) / standard deviation

A negative z-score means the fund is trading at a price lower than its average discount.

A positive z-score means the fund is trading at a price higher than its average discount.

Luckily, CEFConnect has thought of that and allowed you to add a z-score column.

Go back to the CEFConnect screener and click ‘Criteria.’

Change the criteria of your CEF screen

Expand the ‘Pricing’ section on the left side and select ‘Z-Score 1 Year.’

Add the 1-year Z-score to your search criteria

If you hit ‘View Funds’ again, you’ll see the same list of CEFs but now there will be a column with the one-year z-score of each fund.

Now we can sort the ‘Premium/Discount’ column from low to high again and start searching for funds with a low z-score.

Now the z-score is included in our CEF screener

A z-score lower than -1 is worth a closer look.

For this example, I found Alliance CA Municipal Income (AKP).

Looking at the ‘Pricing Information’ over a 5 year period, I see that the fund is trading near it’s deepest discount.

Example of a fund trading near it's 5-year lowest discount

This is definitely a fund I’d consider buying.

The Snap Back

If you do end up buying a CEF and are interested in earning a bit more than the annual tax free income, you can watch for the snap back.

What’s the snap back?  It’s when a CEF that is deeply discounted snaps back to it’s “average” discount.

In the case of AKP, you’ll see a table that lists the average discount or premium over the last 6 months, 1 year, and 5 years.

Say I buy AKP at a 10% discount and then I wait.  Each month I’m collecting a dividend with a tax equivalent yield around 8%.

Then, at some point, AKP snaps back to its 5-year average discount of -6% and I sell.

I’ll take those profits and go looking for another deeply discounted CEF.

Taking advantage of the snap back isn’t a must.

If you’re just looking for a guaranteed monthly dividend from your investments, buy and hold the CEF forever.  Collecting a dividend yield as high as 10% isn’t a bad consolation prize.

Conclusion

Following the 7 Truths and investing in high-quality, high-value dividend stocks will provide a great passive income.

But if you’re concerned about budgeting and want to make sure a monthly paycheck is coming in, consider rounding out your portfolio with monthly dividend stocks.

I’d recommend holding off shifting any of your portfolio to CEFs until you actually need to withdraw those monthly dividends.

Use the 7 Truths to build a strong portfolio.  That includes REITs.  Reinvest the dividends right back into more dividend paying stocks.  This will grow your snowball as quickly as possible.

Then, when the time comes to start paying the bills with your dividends, shift some of it over.   Start collecting that tax-free monthly dividend from CEFs.

CEFs won’t grow your snowball very fast but they do throw off plenty of powder.

Have any of you ever invested in closed-end funds?  Any recommendations?

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