Does it make sense to build a dividend portfolio to generate steady & reliable monthly dividend income?

We have been building our dividend portfolio since 2011. Over the last 14 years, we have made many mistakes, which have allowed us to learn many valuable lessons. Needless to say, our portfolio has gone through some significant changes. 

When we started building our dividend portfolio, many of the holdings were REITs or income trusts that paid monthly dividends. Over time, we switched them for quarterly paying dividend stocks and ETFs. As a result, our dividend income went from very steady to very lumpy. 

Recently, a few readers asked me via email some interesting questions: Does it make sense to build a dividend portfolio to generate steady and reliable monthly dividend income? Why did we switch from a portfolio consisting mostly of REITs and income trusts to what we have today? 

Let’s explore these questions. 

Does it make sense to build a dividend portfolio to generate steady & reliable monthly dividend income? 

First of all, why would one want a dividend portfolio that would generate steady and reliable monthly dividend income? I believe the biggest draw is the psychological edge.

Since most dividend-paying stocks pay dividends quarterly, it’s not unusual to have lumpy monthly dividend income, in which some months the dividend amount is quite high and some months the dividend amounts are much lower in comparison. This is exactly what we have with our dividend income nowadays – we have stronger dividend income in January, April, July, and October. We then have much weaker dividend income in February, May, August, and November. 

So, with a steadier and more reliable monthly dividend income, it provides some level of psychological comfort. Having a smooth and predictable monthly dividend income can also help with monthly budgeting. If you spend $5,000 a month and receive $5,000 in dividend income every month, you know you’re golden. If you receive more than $5,000 in dividend income per month, then you know you have a buffer. Therefore, it is easier to budget when you know exactly how much money you have coming in every month. Having a steady cash flow is especially beneficial in semi-retirement and retirement (A similar analogy would be working full time and having regular paychques every two weeks). 

On the other hand, when you have lumpy monthly dividend income, it means you need to have some cash in hand to compensate for the weaker months. Budgeting with a variable income is a little bit trickier so it may not be for everyone.  

In some ways, having steady and reliable monthly dividend income encourages long term holding and reinvesting strategy. Because you’re getting a steady cash flow from dividend paying stocks, you are less likely to sell these stocks in bad times. 

Receiving dividend paycheques can also be beneficial when you’re not living off dividends. Because you’re receiving dividends every month rather than quarterly, if you enroll in dividend reinvestment plans (DRIP), you can compound your money faster. This is exactly why we are dripping with our SmartCentres REIT and Granite REIT dividends. 

Why it may not be a good idea to have a steady & reliable monthly dividend income 

While there are some key benefits of having a dividend portfolio that generates steady and reliable monthly dividend income, there are actually some downsides we need to be aware of. 

To have a steady and reliable monthly dividend income, you probably would need to rely mostly on REITs and income trusts which pay monthly dividends. (Note, I realize there are a few stocks that pay monthly dividends but they are not the norm).This means your portfolio would be focused heavily on certain sectors. You would also be sacrificing geographical and sector diversification for the sake of monthly payouts. Furthermore, because REIT and income trusts usually have higher yields, your portfolio may be skewed slightly toward high yield stocks, which could lead to potentially higher risk. 

• Best Canadian monthly dividend stocks

Arguably most importantly, because REITs and income trusts don’t pay eligible dividends, if you invest REITs and income trusts in non-registered accounts, you won’t get preferential tax treatment. Dripping REITs and income trusts in non-registered accounts also becomes more complicated due to the tax implications (because REITs and income trusts don’t actually pay dividends, they pay distributions). 

Another one problem with REITs and income trusts is that there’s limited payout increases. Although the initial yield may be high, no payout increase means your real purchasing power diminishes every year thanks to inflation. 

At the time of writing, there are 25 publicly traded REITs in Canada. There are only three of them on the Canadian Dividend All-Star List and only seven of them have a dividend growth streak of more than one year. This means that over 70% of these REITs don’t consistently raise dividend payout and only 12% of them have a dividend growth streak of over five years (Granite REIT, InterRent REIT, and CT REIT are the only REITs that have raised dividend payout for more than 5 years straight). 

And when I took a quick look at income trusts, none of them have made it to the Canadian Dividend All-Star List. 

You’re probably thinking, well can I simply avoid REITs and construct my portfolio such that I look at the dividend calendar and pick specific stocks that pay at different intervals? 

You can certainly do that. However, by picking stocks that pay dividends at certain quarters, you are limiting your choices. For example, if you’re like us where you have weaker dividend income in February, May, August, and November, you may want to invest in dividend stocks that pay dividends in these months. Because there are only 28 Canadian companies that pay dividends in February, you are restricting your choices and overexposing yourself to certain sectors or companies. Essentially you are increasing your risk and potentially reducing portfolio diversification.  

Pros & Cons of having monthly dividend stocks and a steady monthly dividend income 

To summarize, here are some of the pros and cons for having monthly dividend stocks in you investment portfolio and having a steady monthly dividend income:

Pros

• A predictable cash flow gives one psychological comfort
• Helps reduce any potential anxieties
• Steady cash flow leads to easier budgeting
• Encourages long term holding and reinvesting strategy
• During accumulation phase, dripping monthly allows for a faster compounding than quarterly dripping

Cons

• Diversification risk, may be over-exposed to REITs and income trusts
• Skewed toward higher yield investments, potentially higher risk
• Overexposure to certain sectors and stocks
• Limited choices as not many stocks pay monthly dividends
• Limited organic dividend growth which means inflation can become a concern

Our experience with steady & reliable monthly dividend income 

As mentioned, when we first started building our dividend portfolio,  many of our holdings were REITs or income trusts, such as Just Energy, Liquor Store, Pure Industrial REIT, KEG Income Trust, Dream Office, H&R REIT, Dream Industrial REIT, RioCan REIT, etc. This was quite evident if you look at our dividend income history chart:

As you can see from 2011 to 2013 our monthly dividend income was quite steady. It got a bit more lumpy in 2014 but smoothed out from 2015 to 2018. The lumpy monthly dividend income didn’t really start to happen until around 2019. The lumpy effect was amplified starting in 2020. Nowadays, we have clear strong months and weaker months that are hard to ignore. 

What caused the transition? Well, we got rid of many monthly payers and focused on investing in solid profitable companies that would raise dividend payout consistently. We also stopped limiting ourselves to stocks that paid dividends in specific months. As we ramp up hybrid investing (investing in both dividend stocks and index ETFs), some ETFs like XAW pay semi-annual distributions, which further amplifies the lumpy dividend income. 

In other words, we have been approaching our investment portfolio more holistically, focusing on dividend growth, geographical and asset diversification, and more importantly, total return.

Looking ahead, we believe we are OK dealing with variable dividend income and plan to budget accordingly. This is one of the reasons why we would like to increase our cash reserves. 

Summary – Does it make sense to build a dividend portfolio to generate steady & reliable monthly dividend income? 

So, does it make sense to build a dividend portfolio to generate steady and reliable monthly dividend income?

I believe it totally depends on who you are as an investor and your situation. Personal finance is personal so there’s “no-one-size-fits-all” solution. For us, we used to think having steady and reliable monthly dividend income made sense but we have deviated from that belief. 

In general, a monthly dividend income portfolio can be an effective strategy for retirees to have a steady cash flow. It can help retirees sleep better at night and prevent them from making emotional decisions. 

Now, if you do decide to construct a dividend portfolio that generates a steady monthly dividend income, just remember the following key points:

• Ensure the portfolio is well diversified both in terms of sector and geography
• Focus on total return. Do NOT just chase yield
• Focus on dividend reliability rather than cash flow. There’s nothing worse than dividend cuts, reducing your cash flow

Happy investing everyone!