I think dividends are great, especially for a hands-off approach to investing. Dividend-paying stocks help reduce volatility in a portfolio. Many such stocks are less volatile than high-growth technology companies like NVDA.
Dividend Frequencies
Companies and funds typically pay dividends on a set schedule. The most common frequencies are:
- Quarterly (every three months)
- Monthly
- Annually (once per year)
I prefer monthly dividend–paying ETFs and REITs because they generally preserve their value while generating stable, recurring income.
Example: IEF
The iShares 7–10 Year Treasury Bond ETF (IEF) tracks the performance of U.S. Treasury bonds with maturities between 7 and 10 years. Its price has recently fluctuated in a narrow range of about $94–$96, providing stability. The yield has remained steady for the two years I have held it.
Converting Dividend Yield
Dividend yields are quoted on an annualized basis. To find the monthly equivalent, divide the annual yield by 12:
\[ \text{Monthly Yield} = \frac{\text{Annual Yield}}{12} \]
For example, an annual yield of 6% corresponds to a monthly yield of:
\[ \frac{0.06}{12} = 0.005 = 0.5\% \]
High-Yield Example
When I discovered LQDW and others, I was surprised that yields in the high teens were possible—but they are real. These types of investments can be much more rewarding than a savings account, though they carry trade-offs that should be carefully considered.
Pros
- Higher income potential: Yields in the double digits can generate far greater cash flow than traditional dividend stocks or bonds.
- Compounding effect: Reinvesting dividends can accelerate growth in both income and capital over time.
- Attractive alternative to cash savings: Compared with savings accounts, which may offer only modest returns, high-yield instruments provide an opportunity to put capital to work.
- Dividends may be increased: Depending on economy and performance, companies may raise dividends.
Cons
- Risk of capital loss: Higher yields often reflect higher risk. Prices can decline sharply if market conditions change.
- Sustainability of yield: Some companies or funds may not be able to maintain such high payouts indefinitely.
- Liquidity concerns: Depending on the security, it may be harder to exit a position quickly without accepting a lower price.
- Interest rate sensitivity: High-yield instruments, especially in fixed income or credit markets, can be highly sensitive to shifts in interest rates or broader economic stress.
- Dividends may be decreased: Depending on economy and performance, companies may lower dividends.
For me, the appeal lies in balancing these factors. The income is very attractive, but I remain cautious about the risks. Reinvesting dividends from high-yield positions can compound returns, but it requires careful monitoring to avoid being caught in a decline that erodes capital.