Monthly vs. Quarterly: The Dynamics of Dividend Payouts in Canada

Investors should make investment decisions based on business fundamentals. Whether a stock pays monthly or quarterly should not be a factor.

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Dividends may be paid out every month, quarter, half year, or year. Most Canadian dividend stocks pay out either monthly or quarterly.

Does it matter if you’re getting paid monthly or quarterly?

From a budgeting perspective, it’s helpful to earn monthly payouts, because many of our bills are monthly, and it’s just easier to plan our spending on a monthly basis than on a quarterly basis.

From an investment perspective, if you’re reinvesting dividends, all else equal, a monthly dividend stock would compound for higher returns than a quarterly dividend stock. That is because you’d receive the dividend amount and reinvest it sooner.

Focus on quality dividend stocks

Instead of targeting to own monthly dividend stocks, investors should focus on the business fundamentals and seek to own quality dividend stocks (no matter if they pay out monthly or quarterly).

Investors can look for monthly payers in Canadian real estate investment trusts (REITs). For example, CT REIT’s (TSX:CRT.UN) stock valuation has gone down from rising interest rates since 2022. At $13.82 per unit at writing, the retail REIT offers a good monthly cash distribution yield of 6.5%. A reversion to the mean could also drive price appreciation of approximately 24%.

Canadian Tire is CT REIT’s core tenant. 263 of 372 of CT REIT’s income-producing properties are locations of Canadian Tire stores. Although Canadian Tire’s business is somewhat sensitive to the economic cycle, it has remained sufficiently profitable in the last two recessions to maintain or increase its dividend. CT REIT last reported an industry-leading occupancy rate of 99.1%. Canadian Tire also maintains an investment-grade S&P credit rating of BBB.

Year to date, CT REIT increased its funds from operations (FFO) per unit by 3.8% and adjusted FFO (AFFO) per unit by 5.4%, resulting in FFO payout ratio of about 67% and AFFO payout ratio of about 73%. Both ratios indicate a sustainable monthly payout.

Notably, Canadian REITs pay out cash distributions that are like dividends but are taxed differently. In non-registered accounts, the return-of-capital portion of the distribution reduces the cost base. The return of capital is tax deferred until unitholders sell or their adjusted cost base turns negative. 

REIT distributions can also contain other income, capital gains, and foreign non-business income. Other income and foreign non-business income are taxed at your marginal tax rate, while half of your capital gains are taxed at your marginal tax rate.

If you hold Canadian REITs inside tax-advantaged accounts like a Tax-Free Savings Account, Registered Retirement Savings Plan, Registered Disability Savings Plan, Registered Education Savings Plan, or First Home Savings Account, you won’t need to worry about the source of income other than foreign income which may have foreign withholding tax. When unsure of where best to hold REIT units, seek advice from a tax professional.

Investor takeaway

Although it’s convenient to earn monthly income to help pay the bills and budget, investors should make investment decisions for dividend stocks by researching the fundamentals of the underlying businesses. Whether a stock pays monthly or quarterly should not be a factor. Investors can project the annualized payout amount and ensure they have enough cash on hand for their spending needs.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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