Most stocks pay dividends on a standard quarterly schedule, but there are a select few that pay shareholders monthly. This allows for faster compounding if those dividends are reinvested every month. Also, monthly dividend payments offer better income timing if those dividends are used to pay living expenses.

In this article, we’ll take a look at three of the highest-yielding monthly dividend stocks, noting the risk and reward potential for all three.

Monthly dividend payers tend to be somewhat riskier than traditional dividend stocks, and the three we’ll look at are no exception. However, they do offer very high yields as compensation.

Monthly dividend stocks to consider are:

• Orchid Island Capital (NYSE: ORC)
• Armour Residential REIT (NYSE: ARR)
• Oxford Square Capital Corp. (NASDAQ:OXSQ)

Monthly Dividend Stocks: Orchid Island Capital (ORC)

Our first monthly payer is Orchid Island capital, a specialty finance company that invests in residential mortgage-backed securities, or RMBS. The company’s primary investment vehicle is single-family RMBS, but it also invests in interest-only securities and principal-only securities in some cases. Orchid was founded in 2010, generates about $110 million in annual revenue, and trades with a market capitalization of $682 million.

Growth for any kind of mREIT is going to be challenging, given they have very high costs of capital, and very slim margins as a result. In practice, this means that often, raising additional capital and expanding the balance sheet doesn’t necessarily correspond with stronger earnings.

Mortgage REITs such as Orchid borrow money at very high short-term rates – or issue common or preferred shares – to raise capital, and then attempt to invest the proceeds at higher, long-term rates, collecting the spread between the two rates. However, when interest rates are rising in the short-term, it makes raising capital more expensive, which is why mREITs sometimes generate operating losses. Mortgage REITs need a steep yield curve to make consistent profits, so that’s a big risk for shareholders of Orchid or any other mREIT.

As a result of this, we currently see slightly negative growth on the horizon for Orchid, given rates remain very low, and the slope of the yield curve is working against Orchid. We think the company will struggle to grow on a per-share basis for the foreseeable future.

Orchid today yields nearly 16%, so its payout is absolutely massive by any definition. However, the reason it is so high is because of the risky nature of its business, and the fact that it has a spotty track record of being able to afford its payout over time. In other words, the dividend yield is as high as it is because investors are compensating for the inherent risk of a dividend cut.

Since the company went public in 2013, it has only covered its full-year dividend two times in eight years. The other six years were deficit-funded by debt or equity issuances. Today’s payout ratio is estimated at about three-quarters of earnings, so we see the dividend as safe for the moment, but we advise investors to remain cognizant of the inherent risks to the payout.

Armour Residential REIT (ARR)

Next up is Armour Residential, another mREIT that invests in RMBS in the U.S. Armour generally invests in U.S. government-sponsored entities’ securities, as well as the GNMA’s issued or guaranteed securities. The GSEs and GNMA issue fixed rate, hybrid adjustable rate, and adjustable rate home loans that Armour uses its capital raise proceeds to purchase and hold. Armour has a small amount of its portfolio in non-government-backed securities, but it is primarily invested in government-issued or secured instruments.

Armour was founded in 2008, generates just over $100 million in annual revenue, and trades with a $908 million market capitalization.

We estimate Armour can produce 2.7% annual growth from today’s levels, but note that like Orchid, Armour’s earnings can be extremely volatile. Indeed, there are years where Armour’s revenue is actually negative if rates move against its portfolio, so this one is not for the risk-averse.

Armour suffers from the same yield curve compression as other mREITs, so rates are of the utmost importance for Armour as well, and something investors should keep a keen eye on.

Armour has done a decent job of covering its dividend in the past decade, but today’s payout of $1.20 per share annually looks to be at risk. The current yield of more than 11% is extremely high, but we see that as 114% of earnings for this year, so Armour would need to cover the deficit with capital raises. That’s sustainable for a short period of time, but we also cannot rule out a possible cut in the relatively near future.

Monthly Dividend Stocks: Oxford Square Capital Corp. (OXSQ)

Our final monthly dividend stock is a business development company, or BDC, called Oxford Square Capital. This company has a similar model to mREITs in that it raises capital and attempts to invest that capital at a higher rate. However, the difference with a BDC is that instead of targeting mortgage-backed securities, it makes loans to and investments in middle market companies that cannot access public capital markets. These targets generally have annual revenue of less than $200 million, and Oxford typically takes positions of less than $30 million.

Oxford was founded in 2003, generates less than $40 million of annual revenue, and trades with a market capitalization of $200 million.

Oxford’s growth on a per-share basis has been quite negative for the past decade, with the majority of years coming in lower than the previous year. Oxford has struggled to cover its funding costs, and we don’t see that changing. We currently project no growth for Oxford for the foreseeable future.

We see rising rates as a positive for Oxford, but only if the yield curve steepens given it still has to borrow in order to fund new investments. Until spreads improve materially, we see Oxford as growth challenged.

The dividend has also been quite a risky proposition for Oxford over the years, as earnings have only covered the dividend once in the past decade on a full-year basis. We see the payout ratio at 117% of earnings for this year, so Oxford will be forced to cover part of its distribution with capital that does not come from earnings.

Final Thoughts

Monthly dividend stocks are a great way to enjoy some extra compounding, or to pay living expenses, but they are not without their risks.

The three we’ve highlighted here all carry with them additional risks, including interest rate risk, as well as very high payouts. Thus, while the yields on these stocks can be quite tempting – particularly when it is paid monthly – it is worth noting that these stocks have very high yields to compensate investors for the likelihood dividends could be cut.

Given this, we recommend investors with all but the highest tolerances for risk steer clear of this group.

On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.