Monthly Dividends Are the Latest Income Craze, but There Are Risks

Logo of Realty Income Real estate investment trust company on a computer. (Dreamstime)

Key Points

• An increasing number of stocks and funds are offering monthly or weekly dividend payouts to appeal to investors seeking passive income.
• Several real estate investment trusts, including UDR and Invesco Mortgage Capital, switched to monthly payouts this year.
• Financial experts and market performance warn that frequent payouts do not guarantee rising share prices or superior total returns.

The idea of cashing dividend checks that roll in as your bills come due has a lot of appeal. Just look at all of the chatter extolling “passive income” online. An increasing number of stocks and funds aim to help Americans achieve this dream, promising monthly or even weekly dividend payouts. But there are risks to be aware of, too.

While mortgage and credit card bills are due every month, investors have typically had to wait longer for investment income. The vast majority of stocks pay quarterly dividends, while Treasuries and corporate bond interest payments typically arrive every six months.

Some investments offer a more frequent cadence. Perhaps the most prominent stock is Realty Income, a real estate investment trust that yields 5.3% and dubs itself “The Monthly Dividend Company.” Recently, a handful of other REITs have adopted the same strategy. Denver-based residential REIT UDR, which yields 3.5%, and Invesco Mortgage Capital , yielding more than 20%, both switched to monthly payouts this year.

In June, Bitcoin company Strategy began paying semi-monthly rather than monthly dividends on its Variable Rate Series A Perpetual Stretch Preferred Stock, yielding 11.9%, in part to quell volatility in the security as investors rapidly traded into and out of the stock around the dividend record dates.

Plenty of exchange-traded funds also make monthly or even weekly payouts, especially an increasingly popular category of funds that write call options to generate extra income. There is an element of convenience for funds, since historically options contracts expire monthly.

The $46 billion JPMorgan Equity Premium Income ETF, yielding 8%, is the ETF market’s most prominent covered call fund. It owns a portfolio of stable blue-chip stocks and sells out-of-the-money call options on the S&P 500 index “to deliver monthly distributable income and equity market exposure with less volatility” than owning stocks alone.

Some ETFs make payouts even more frequently. YieldMax offers one roster of option-income ETFs targeting popular market benchmarks and industries like mining and technology and another roster targeting single stocks like Berkshire Hathaway and Meta. Roundhill’s “WeeklyPay” ETFs employ swap contracts to deliver income and magnified exposure to stocks, along with funds targeting Treasuries and gold.

Are monthly or weekly payouts a good deal? There are some caveats investors should be aware of.

While the idea of lining up dividends to pay your monthly bills is appealing, it’s not that simple. Unlike bonds, which typically pay a fixed coupon until they mature, dividend payouts can fluctuate.

Realty Income —the REIT that bills itself as the Monthly Dividend Company—is a dividend aristocrat, a designation for S&P 500 companies that have increased their dividends for at least 25 consecutive years. Realty Income has done so for more than 31 years. It’s a distinction that should give investors some comfort.

But the JPMorgan Equity Premium Income ETF , the popular covered-call ETF, doesn’t necessarily aim for consistent month-to-month payouts and has issued monthly payouts as high as 45 cents and as low as 34 cents a share in the past year.

In an email, JPMorgan said payments fluctuate because of stock market volatility and added that this was a boon to investors since volatility tends to increase the value of premiums the fund can earn by writing out-of-the money call options. “Volatility is a tailwind to the income,” the firm wrote. “Higher equity volatility leads to higher monthly income.”

Perhaps a bigger issue for investors to keep in mind is total returns. A monthly income check—even a stable one—doesn’t guarantee a rising share price. It’s been a difficult market for REITs, thanks to rising interest rates and dour consumer sentiment. Shares of Realty Income have delivered a total return of about 15% over the past five years, compared with more than 84% for the broad market. Realty Income didn’t immediately respond to a request for comment.

In other words, investors who reach too quickly for a monthly check risk leaving money on the table.

“I would never recommend an investment simply because it pays monthly or weekly,” says Thomas Ravert, a financial planner at Pathway Capital Corp. “Distribution frequency is a convenience, not an investment strategy or thesis. What matters is whether the income is sustainable and what the investor is earning on a total-return basis.”

Write to Ian Salisbury at ian.salisbury@barrons.com

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