Achieve a passive income through monthly dividends
What is a monthly dividend?
stock corporations divide their share capital into shares, which they sell to various investors. The shareholders hope that an investment in shares will result in both price gains and a share of the company's profit. The profit share is paid out to the shareholders in the form of a dividend. The German Stock Corporation Act describes the dividend as an amount to be distributed. The Executive Board of a stock corporation proposes the amount of the dividend payment to the shareholders. Subsequently, Annual General Meeting must give its approval to the amount to be distributed. A simple majority of all participants at the Annual General Meeting is sufficient for this purpose.
The German Stock Corporation Act stipulates that shareholders receive the return on their investment once a year. Until the end of 2016, dividends were distributed one day after the company's Annual General Meeting. Since January 1, 2017, an amendment to the German Stock Corporation Act has been in effect, according to which dividends are transferred to shareholders on the third banking day after the Annual General Meeting. In other countries, such as the UK, Spain, the Netherlands and above all the USA, stock corporations pay quarterly or even monthly dividends. Some companies voluntarily choose to pay dividends during the year in accordance with their country's legal requirements. Other companies are obliged by law to distribute profits to their shareholders on a monthly basis. In return, companies receive tax benefits or other state benefits.
Passive income from monthly dividends
Investors who invest in shares of German companies receive dividend payments only once a year. As a glance at a dividend calendar shows, many German stock corporations hold their annual general meetings in spring and summer. Especially in the months April to June there are numerous distributions of the dividends resolved at the Annual General Meeting, while at the end of the year only a few companies invite their shareholders to a meeting. Even if an investor owns shares in several companies, he does not receive a dividend every month.
By buying foreign securities an investor can build up a regular passive income. American real estate companies in particular benefit from the tax advantages offered by the law when they operate as Real Estate Investment Trust (REIT). In order to receive the tax benefits, companies must undertake to pay out up to 90 % of their profits to shareholders. The distributions take place on a monthly basis so that investors receive a credit to their account every month. Investors with a high stock of shares can achieve a regular income, which corresponds to the salary from a paid job.
Advantages and disadvantages of monthly dividends
Regular monthly dividends are either additional earnings for an investor or you can even replace a salary. The more shares with a monthly dividend an investor owns, the higher the amount credited to his account each month. The shareholder can either use the money for his daily living or he can reinvest the dividends. With reinvestment, the dividend yield increases because the investor achieves a compound interest effect. Investors must bear in mind, however, that a monthly dividend is usually considerably lower than a dividend paid at the end of a financial year. Only by owning many shares with a monthly dividend payment can a significant income be achieved.
One disadvantage of monthly dividend payments from shares of US companies is the greater administrative burden regarding taxation. The American tax authorities calculate 30 % withholding tax. German shareholders can halve this tax to 15 % if they send the completed and signed form W-8BEN to the custodian bank in Germany. With this form the investor confirms that he is not subject to US tax liability. This halves withholding tax in the USA within the framework of a double taxation agreement with Germany. After the dividend is credited, an additional 10 % German final withholding tax is payable, as the tax rate for capital income in Germany is 25 %.
Pay attention to the risk of price volatility
Many companies that pay a monthly dividend are subject to special legal regulations. The companies benefit from tax advantages or other benefits that can save them money. Often these are companies that are active in the real estate industry or that take care of the energy supply of the country or a certain region. In order to obtain the financial advantages and privileges, the state imposes conditions on the beneficiary company. These conditions often include an invitation to distribute up to 90 % of the profits achieved to the shareholders.
If a company is allowed to keep maximum 10 % of its profits every month, the management can almost nothing reinvest. This applies both to the purchase of new machines and to the increase of personnel or the search for new business premises. Even salary increases for the employees and the managing directors are only possible to a very small extent, so that frequently a high fluctuation prevails within the workforce. As a result, the company can lose the connection to its competitors and the share price loses value. Therefore the deposit of investors, who obtain a passive income by monthly dividends, is subject to a increased risk of price fluctuations!