Over the past year or two, ASX income shares that pay out monthly dividends have exploded in popularity. Stocks that pay out monthly dividends and that have been around for a while have seen a tangible increase in interest and valuation.
Meanwhile, the number of stocks that offer investors the prospect of monthly dividends has also increased. One of the newest offerings, the BetaShares S&P Australian Shares High Yield ETF (ASX: HYLD), only joined the ASX in August last year.
With many ASX investors evidently excited about these monthly dividend payers, it might be a good opportunity to discuss their pros and cons today.
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The upside of a monthly ASX dividend share
Well, the first upside is the obvious one: investors get to enjoy a regular paycheque from their investments. The vast majority of dividend payers on the ASX only fork out payouts every six months. Some offer quarterly dividends, but a biannual schedule is by far the most common arrangement.
Many investors are ok with this, but some prefer the regular cash flow and predictability that a monthly payer can offer. After all, a monthly paycheque from one's investments isn't too far off the experience of collecting a regular salary.
There's also the added benefit of receiving your cash as soon as possible. Monthly dividends mean getting the cash up to five months early. That's five months when you can reinvest it, or else leave it in the bank collecting interest.
That's the upside of a monthly dividend stock. But let's talk about the potential downsides.
The cons of monthly income
You might not think there is much of a potential downside to a monthly dividend stock. However, I think there are some potential pitfalls to watch out for.
Firstly, stocks that pay out monthly dividends usually prioritise providing income to their investors above all else. Whilst that might sound obvious, bear in mind that this might come at the expense of long-term returns. The stock's management may sell some of its assets to keep its cash levels at the required threshold to fund monthly payouts, potentially cannibalising future returns. Many monthly payers also don't deliver a long-term performance that matches a simple index fund as a result.
Secondly, paying out dividends 12 times a year is expensive. There's six times more ASX paperwork to lodge compared to a regular ASX share, more administrative work to make sure the money heads out on time each month, and, as we've just discussed, cash flow levels to maintain.
Monthly dividend payers often pass these costs on to investors in the form of higher annual management fees. These can further eat into returns over time.
Foolish Takeaway
I love monthly dividend payers as much as the next ASX investor. However, it is not an investment model without its own burdens. As such, I would recommend that any ASX investor looking at a monthly dividend stock examine its performance history closely before investing.
