We all want the best when it comes to either High Interest Savings Accounts or Dividend Paying Shares. But, what happens when a stock pays you a dividend every month instead of yearly or half yearly? Is the yield on cost calculation better? Will you really be better off in the long run if you choose to take a monthly dividend paying stock over a yearly paying stock? Well, let’s find out.
Firstly, we need to set up some parameters to determine what we are going to calculate. Let’s go with a 10 year time frame, 5% yield and all dividends/money is reinvested. This obviously take into account pricing and discounts. We will start with $10,000 and compound that monthly over 10 years and we will also start with $10,000 and compound that over ten years but the compound frequency is once a year. Alright, let’s take a look at the results.
As you can see, the yearly interest nets $500 in the first year which represents that 5% yield. As time goes on (and money reinvested) the interest gained starts to climb. At the end of 10 years the total value of the investment is $16,288.95.
I won’t share the whole image as it’s quite large but compounding interest monthly is calculated by 5%/12 months = 0.004167% interest compounding monthly. If the interest is compounding monthly then you would think the interest would add up quickly. While it does outperform the yearly compound frequency, the amount is quite negligible. The yearly first year netted $500 in interest, in the first year of monthly interest payments it netted $511.62, an increase of $11.62.
Over the span of 10 years, the yearly payments equal $16,288.95 and the monthly payments have a final value of $16,470.09, which is an increase of $181.15 over 10 years.
Realistically, this is quite low and won’t really change the outcome of the investment. Over the ten years the monthly compounding has a 1.81% larger yield on cost compared to a yearly payment. As the yield increases then the difference starts to become larger as the yield payments are larger. The higher the yield the larger he payments, makes sense to me.
Finding a monthly paying dividend stock is very limited and typically only occurs with Real Estate Investment Trusts (REITs). Some of the more famous monthly payers are Realty Income Corp (O) and in Australia there are a couple that I know of that are monthly dividend payers. They are APN Group’s Australian REIT managed fund (APF01) and their Asian REIT managed fund (APF02).
Disclaimer: While I have double checked these calculations there is always room for error. Please conduct your own analysis to see if a monthly dividend payer is right for you.
I own APF01 and APF02 in my own portfolio, I do not own Realty Income Corp (O).