Many investors know there is a lot of potential in an income-generating portfolio. However, they often overlook the benefits of monthly dividend exchange-traded funds (ETFs) in favor of individual dividend-paying stocks.
That's a lost opportunity. Monthly dividend ETFs are an important part of any portfolio that is looking to generate yield, either for passive income potential or simply as a way to supplement returns beyond simple share appreciation. In fact, the benefits of monthly dividend ETFs make these investment vehicles superior in many ways to individual stocks.
Thanks to the affordability and accessibility of exchange-traded funds in the modern investing era, all investors should consider this family of ETF products within reach. And no matter what your personal investment strategy, chances are you'll find the benefits of monthly dividend ETFs appealing to you.
The most obvious benefit of a monthly dividend ETF is that this kind of investment allows for a steady flow of cash on a reliable schedule. After all, the typical U.S. corporation pays quarterly, not monthly. Even more challenging are international investments like Swiss consumer giant Nestle (NSRGY) that only pays its dividend a single time per year.
Particularly for investors looking to generate passive income that they can use to defray regular expenses like their gas bill, infrequent distributions create logistical problems. If you can expect a monthly "paycheck" from a dividend ETF, life is much easier on your personal budget.
Frequent paydays
Speaking of reducing risk, a popular way to smooth out some of the bumps in the road for your portfolio is to average in to a position over time. That means several smaller purchases of a stock or an ETF instead of buying a big chunk at once and hoping at that time that you're getting a good price.
Dividends each month take some of the guesswork out of this approach, through a strategy known as DRIP or a dividend reinvestment program. Almost every major broker allows you to automatically reinvest your dividends, and sometimes even with tax benefits.
If you don't need the income potential immediately, you can simply turn on the DRIP feature and watch your dividend ETF shares grow steadily each month. Over many months, those extra shares will add up significantly.
DRIP potential
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Another big benefit of monthly dividend ETFs is diversification. As with all exchange-traded funds, you are buying a basket of investments instead of one stock when you purchase a monthly dividend ETF.
This is an important factor, because even seemingly bulletproof companies can sometimes suffer unexpected troubles.
The most glaring example of this for dividend investors is fallen blue chip General Electric Co. (GE), which has seen its stock slashed by 60% since 2008 and currently pays a measly 1 cent per quarter after three dividend cuts in the intervening years. If you owned GE stock a decade ago with hopes of building your retirement on this seemingly low-risk company, you are simply not getting the kind of payday you had planned on.
With an ETF, investors spread that risk around to help avoid such disastrous declines in either dividend potential or principal value.
Diversification to reduce risk
You may think that such a specific strategy exists only in a handful of products right now. However, there are dozens – perhaps even hundreds – of funds that fit the bill.
There are vanilla index funds like the SPDR Dow Jones Industrial Average ETF (DIA) that allows you to take on broad exposure to the biggest U.S. stocks, and spreads their dividends out so they are paid monthly.
If you want a higher yield, then the Invesco KBW High Dividend Yield Financial ETF (KBWD) focuses on banks that pay you big paydays, with a current yield of more than 8%.
And outside of stocks, there are funds like the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) to play so-called junk bonds or the iShares Preferred and Income Securities ETF (PFF) as a way to own a basket of preferred stocks.
The list goes on and on. Whatever your investing strategy, there's likely a monthly dividend ETF that offers just the approach you're seeking.
Wide variety
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