Income investors who primarily use common stocks know that investing for monthly income can be tricky because most U.S. stocks pay dividends on a quarterly basis. Foreign dividend payers are even less steady in terms of regularity of payments, as many of these companies only deliver their dividends once or twice a year. The good news is investors do have multiple options when it comes to building a steady stream of monthly income. Consider the following ideas.
Many income investors already have some bond exposure in their portfolios, but that exposure need not be limited to U.S. Treasury bonds. Investors looking for regular monthly income from the bond world have some compelling options. Importantly, those options do not equal infinitely higher credit risk relative to Treasury bonds. Exchange-traded funds that hold investment-grade corporate bonds and highly rated municipal bonds pay monthly dividends. Investors willing to incur a little more risk can also land monthly income with junk bonds and junk bond ETFs, which are riskier due to higher rates of default.
Usually, royalty trusts are associated with two things: The energy sector and high yields. This asset class also offers an important tax advantage in that dividends from royalty trusts are not considered taxable income because of the corporate structure of the trust. For investors looking for monthly income, not all royalty trusts offer that feature, but an ample amount do. The primary risk with royalty trusts is that they cannot make acquisitions or buy new businesses. That means as assets deplete at the trust's area of exploration, dividend cuts are possible.
Laddering is not a specific asset class. Rather it is a strategy investors can easily apply with common stocks to ensure they have a steady stream of monthly income. In this case, the investor would buy several dividend stocks that pay quarterly dividends, but deliver those payouts in different months. For example, one company pays its dividends in January, April, July and November while another company distributes its payout in March, June, September and December. Adding in another stock that pays on a schedule such as February, May, August and November/December can help ensure you receive some income every month.
Investors who do not want to stick-pick themselves or engage in laddering on their own can consider ETFs. Nearly all ETFs focused on U.S.-issued bonds pay monthly dividends. When it comes to U.S. stocks, there is a growing amount of ETFs that have moved to the monthly dividend format from the quarterly payout system. Some ETFs can be volatile and those with big allocations to large-cap U.S. stocks can share tight correlations to the broader market, which is not good in periods of weakness.
- John Foxx/Stockbyte/Getty Images