<PAGE>
STRATTON
MONTHLY
DIVIDEND
SHARES, INC.
================================================================================
SMDS
================================================================================
THIRD QUARTER REPORT
OCTOBER 31, 1996
<PAGE>
DEAR SHAREHOLDER:
We are pleased to report that at the Shareholder's Meeting held on November 29,
you overwhelmingly approved the change of investment concentration from
utilities only to utilities and REITs. Of the approximately 64% of total shares
that were voted, more than 95% approved the change in investment objective. We
thank you for your positive response and believe that it serves the long-term
best interest of the Fund to redirect our investment objective.
At the time of this writing, we have already raised our ownership in REITs to
45% of the Funds assets and lowered our ownership of electric utilities to 35%.
We intend to raise the REITs position to substantially more than half the
assets. The average yield on the REIT portfolio is 8.2%, which is satisfactory
in meeting the current needs of our regular SMDS dividend payout.
You might be interested in knowing some of the characteristics of the REITs in
our portfolio. They are Mid-Cap Companies, with the average market
capitalization being $582 million. The group has had a historic dividend growth
rate of between 7-8%. The portfolio of REITs is trading at ten times estimated
funds from operations in 1997. FFO is comparable to earnings per share of an
industrial company. By contrast, the S&P 500 is trading at about sixteen times
1997 estimates.
We expect to have a total of thirty REITs in our portfolio by the time the
transition is complete; presently the portfolio is twenty-three. These companies
are diversified among a number of sectors: hotel and lodging, commercial
(including shopping centers and malls), apartments and healthcare are the major
industry categories.
A great deal of concern is currently expressed about the high levels of the
stock market and there is nervousness that these price levels are unsustainable.
The REIT portfolio that we are building has very strong defensive
characteristics, as represented by both a very high yield and a very low price
earnings ratio compared to the general market. For the investor who is seeking
high income and defensive characteristics, we believe REITs will meet those
needs. SMDS should continue to provide its investors with a much higher than
average current income and the ability to perform well in bear markets.
Again, we thank our shareholders for having supported a recommendation of
management to make this shift in investment concentration. We believe you will
be satisfied with the results coming from this shift. If you have questions,
please feel free to call a Fund's Representative at 1-800-634-5726.
Sincerely yours,
James W. Stratton Gerard E. Heffernan
Chairman President
December 9, 1996
1
<PAGE>
FUND HIGHLIGHTS
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
----------- --------
1996 1996
----------- --------
<S> <C> <C>
Total Net Assets.................................. $ 100,888,737 $ 104,227,337
Net Asset Value Per Share......................... $ 25.79 $ 25.20
Shares Outstanding................................ 3,912,574 4,136,563
Number of Shareholders............................ 6,113 6,547
Average Size Account.............................. $ 16,504 $ 15,920
</TABLE>
================================================================================
PORTFOLIO CHANGES FOR THE QUARTER ENDED OCTOBER 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
<S> <C>
Atlantic Energy, Inc./(1)/ Central Hudson Gas & Electric Corp./(2)/
Consolidated Edison Co. of NY, Inc./(1)/ Colonial Properties Trust
Dominion Resources, Inc. VA/(1)/ Delmarva Power & Light Co.
Enova Corp. Health Care REIT, Inc.
Houston Industries, Inc./(1)/ Liberty Property Ltd. 8.00% Cv.
Minnesota Power & Light Co. Sub. Debs. 07/01/01/(2)/
PECO Energy Co. Merry Land & Investment Co., Inc./(2)/
The Price Reit, Inc./(1)/ National Health Investors, Inc.
Washington Water Power Co./(1)/ Orange & Rockland Utilities, Inc.
Western Resources, Inc./(1)/ Puget Sound Power & Light Co.
WPL Holdings, Inc./(2)/
</TABLE>
/(1)/ New Holdings /(2)/ Eliminations
TEN LARGEST HOLDINGS OCTOBER 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
MARKET PERCENT
VALUE OF TNA
----------- --------
<S> <C> <C>
U.S. West Communications Group Delaware. .. $ 5,163,750 5.1%
Nevada Power Co. .......................... 5,093,750 5.1
Rochester Gas & Electric Corp. ............ 4,656,250 4.6
Health Care REIT, Inc. .................... 4,585,613 4.5
PECO Energy Co. ........................... 4,418,750 4.4
Consolidated Edison Co. of New York, Inc. . 4,387,500 4.3
National Health Investors, Inc. ........... 4,303,575 4.3
Minnesota Power & Light Co. ............... 4,237,500 4.2
Boston Edison Co. ......................... 4,200,000 4.2
Eastern Utilities Associates. ............. 4,031,250 4.0
----------- ----
$45,077,938 44.7%
=========== ====
</TABLE>
2
<PAGE>
ILLUSTRATION OF AN ASSUMED $10,000 INVESTMENT
IN STRATTON MONTHLY DIVIDEND SHARES, INC.
(With all Dividend Income and Capital Gains Distribution Reinvested)
[LINE GRAPH APPEARS HERE]
[GRAPH APPEARS HERE]
ILLUSTRATION OF AN ASSUMED $10,000 INVESTMENT
IN STRATTON MONTHLY DIVIDEND SHARES, INC.
(With all Dividend Income and Capital Gains Distribution Reinvested)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Investment 9,354 10,808 10,667 11,795 14,604 16,320 13,181 12,824 12,861 12,084
Reinvested Inc. Divs. 1,641 3,107 4,379 6,627 10,328 13,744 13,041 15,044 17,513 19,388
Reinvested Cap. Gains
Distributions -- -- -- -- -- 503 1,043 1,015 1,018 956
----------------------------------------------------------------------------------------------------
Total Value 10,995 13,915 15,046 18,422 24,932 30,567 27,265 28,883 31,392 32,428
====================================================================================================
If Divs. and Distrbs.
We're taken in Cash:
$ Amt. Div. Inc. 924 882 1,013 1,076 1,139 1,197 1,081 1,092 1,076 1,155
$ Amt. Cap. Gains Distrib. -- -- -- -- 263 341 -- -- --
----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial Investment 14,609 15,701 15,060 13,039 14,383 13,538
Reinvested Inc. Divs. 26,570 31,818 33,590 32,499 39,890 40,519
Reinvested Cap. Gains
Distributions 1,156 1,242 1,192 1,032 1,138 1,071
----------------------------------------------------------
Total Value 42,335 48,761 49,842 46,570 55,411 55,128
==========================================================
If Divs. and Distrbs.
We're taken in Cash: 1,024 1,018 1,024 1,008 1,008 756 17,066 TOTAL DIV. INC.
$ Amt. Div. Inc. -- -- -- -- -- -- 604 TOTAL CAP. GAINS
-----------------------------------------------------------
</TABLE>
NOTE: If dividend income and capital gains distributions were taken in cash, the
results would be as shown above under "value of original shares."
Performance quotations represent past performance, and should not be considered
as representative of future results. The investment return and principal value
of an investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
3
<PAGE>
PERFORMANCE COMPARISONS
(Price Appreciation Plus Dividends & Capital Gains Distributions Reinvested)
<TABLE>
<CAPTION>
PERIOD ENDED AVERAGE ANNUAL AGGREGATE
09/30/96 TOTAL RETURN TOTAL RETURN
- ------------ -------------- ------------
<S> <C> <C>
1 year + 3.98% + 3.98%
5 year + 6.55 + 37.30
10 year + 6.50 + 87.64
15 year + 11.52 + 412.91
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Stratton Monthly Dividend Shares Total Investment Return
Period Per Share Data Dividends & Capital Gains Reinvested
- ---------------------------------------------------------------------------------------------------------------------
Year Ended Net Asset Income Capital Gains Capital Income Total
December 31 Value Dividends Distrubutions Return Return Return
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/31/80 (inception) $19.05 - - - - -
- ---------------------------------------------------------------------------------------------------------------------
1980 17.76 $0.985 - - 6.8 % + 5.2 % - 1.6 %
- ---------------------------------------------------------------------------------------------------------------------
1981 18.21 1.755 - + 2.5 + 10.8 + 13.3
- ---------------------------------------------------------------------------------------------------------------------
1982 20.06 1.67 - + 10.2 + 10.5 + 20.7
- ---------------------------------------------------------------------------------------------------------------------
1983 20.49 1.92 - + 2.1 + 9.8 + 11.9
- ---------------------------------------------------------------------------------------------------------------------
1984 22.42 2.04 - + 9.4 + 11.8 + 21.2
- ---------------------------------------------------------------------------------------------------------------------
1985 26.62 2.16 - + 18.7 + 11.2 + 29.9
- ---------------------------------------------------------------------------------------------------------------------
1986 29.21 2.28 $0.50 + 9.7 + 10.8 + 20.5
- ---------------------------------------------------------------------------------------------------------------------
1987 23.44 2.09 0.65 - 19.8 + 8.4 - 11.4
- ---------------------------------------------------------------------------------------------------------------------
1988 23.63 2.08 - + 0.8 + 9.0 + 9.8
- ---------------------------------------------------------------------------------------------------------------------
1989 25.88 2.05 - + 9.5 + 9.3 + 18.8
- ---------------------------------------------------------------------------------------------------------------------
1990 22.66 2.20 - - 12.4 + 8.6 - 3.8
- ---------------------------------------------------------------------------------------------------------------------
1991 28.31 1.95 - + 24.9 + 10.2 + 35.1
- ---------------------------------------------------------------------------------------------------------------------
1992 29.16 1.94 - + 3.0 + 7.4 + 10.4
- ---------------------------------------------------------------------------------------------------------------------
1993 29.17 1.95 - - + 6.6 + 6.6
- ---------------------------------------------------------------------------------------------------------------------
1994 23.78 1.92 - 18.5 + 6.4 - 12.1
- ---------------------------------------------------------------------------------------------------------------------
1995 27.19 1.92 - + 14.3 + 9.1 + 23.4
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The average annual total return is computed by determining the average annual
compounded rate of return during specified periods that equates the initial
amount invested to the ending redeemable value of such investment. This is done
by dividing the ending redeemable value of a hypothetical $1,000 initial
investment by $1,000 and taking the root of the quotient equal the number of
years (or fractional portion thereof) covered by the computation and subtracting
one from the result.
The aggregate total return is computed by determining the aggregate compounded
rate of return during specified periods that likewise equates the initial amount
invested to the ending redeemable value of such investment.
All dividends and capital gains distributions have been reinvested on the
reinvestment dates during the period. There are no sales charges, 12b-1, or
redemption fees of any kind in Stratton Monthly Dividend Shares, Inc.
Performance quotations represent past performance, and should not be considered
as representative of future results. The investment return and principal value
of an investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
4
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) OCTOBER 31, 1996
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- ----------- -------- -------------
<S> <C> <C>
COMMON STOCKS - 86.7%
REAL ESTATE COMMERCIAL - 12.0%
280,000 Crown American Realty Trust.............................. $ 2,170,000
175,000 Excel Realty Trust, Inc.................................. 3,828,125
166,000 IRT Property Co.......................................... 1,597,750
339,000 Mid-America Realty Investments, Inc...................... 3,178,125
40,000 The Price Reit, Inc...................................... 1,310,000
------------
12,084,000
------------
REAL ESTATE DIVERSIFIED - 4.3%
75,000 Colonial Properties Trust................................ 1,987,500
50,000 EastGroup Properties, SBI................................ 1,212,500
78,300 Town & Country Trust..................................... 1,135,350
------------
4,335,350
------------
REAL ESTATE HEALTH CARE - 9.7%
50,000 Health & Retirement Properties Trust..................... 906,250
194,100 Health Care REIT, Inc.................................... 4,585,613
123,400 National Health Investors, Inc........................... 4,303,575
------------
9,795,438
------------
TELECOMMUNICATIONS - 5.1%
170,000 U. S. West Communications Group Delaware................. 5,163,750
------------
UTILITIES - 55.6%
225,000 Atlantic Energy, Inc..................................... 3,965,625
175,000 Boston Edison Co......................................... 4,200,000
150,000 Consolidated Edison Co. of New York, Inc................. 4,387,500
50,000 Delmarva Power & Light Co................................ 993,750
75,000 Dominion Resources, Inc. VA.............................. 2,831,250
250,000 Eastern Utilities Associates............................. 4,031,250
102,200 Enova Corp............................................... 2,299,500
110,000 Houston Industries, Inc.................................. 2,516,250
150,000 Minnesota Power & Light Co............................... 4,237,500
250,000 Nevada Power Co.......................................... 5,093,750
125,000 Ohio Edison Co........................................... 2,609,375
35,300 Orange & Rockland Utilities, Inc......................... 1,239,912
175,000 PECO Energy Co........................................... 4,418,750
160,000 P P & L Resources, Inc................................... 3,740,000
38,200 Puget Sound Power & Light Co............................. 845,175
250,000 Rochester Gas & Electric Corp............................ 4,656,250
83,400 Washington Water Power Co................................ 1,595,025
80,000 Western Resources, Inc................................... 2,400,000
------------
56,060,862
------------
Total Common Stocks (cost $90,986,335)................... 87,439,400
------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) OCTOBER 31, 1996
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- ----------- -------- -------------
<S> <C> <C>
PREFERRED STOCKS - 1.4%
100,000 Psychiatric Group Preferred Depositary Shares.......................... $ 1,425,000
-------------
(each depositary share represents 1/10th of a share of
American Health Properties Psychiatric Group Pfd. Stock)
Total Preferred Stocks (cost $1,777,330)............................... 1,425,000
-------------
PRINCIPAL
AMOUNT
- -----------
CONVERTIBLE DEBENTURES - 5.3%
$ 500,000 Dorchester Gas Corp. 8.50% Cv. Sub. Debs. 12/01/05 *................... 497,600
$2,659,000 Interstate/Johnson Lane, Inc. 7.75% Cv. Sub. Debs. 03/31/11............ 2,492,813
$2,500,000 Mid-Atlantic Realty Trust 7.625% Cv. Sub. Debs. 09/15/03............... 2,381,250
-------------
Total Convertible Debentures (cost $5,332,732)......................... 5,371,663
-------------
SHORT-TERM NOTES - 4.3%
$ 1,280,000 General Motors Acceptance Corp. 5.10% due 11/01/96..................... 1,280,000
$ 1,709,000 American Express Credit Corp. 5.25% due 11/04/96....................... 1,709,000
$ 1,338,000 General Electric Capital Corp. 5.35% due 11/05/96...................... 1,338,000
-------------
Total Short-Term Notes (cost $4,327,000)............................... 4,327,000
-------------
TOTAL INVESTMENTS - 97.7% (COST $102,423,397)**........................ 98,563,063
CASH AND OTHER ASSETS, LESS LIABILITIES - 2.3%......................... 2,325,674
-------------
NET ASSETS - 100.0%.................................................... $ 100,888,737
=============
* Fair value as determined by the Board of Directors.
** Aggregate cost for federal income tax purposes is $102,423,397; and net unrealized depreciation
is as follows:
Gross unrealized appreciation.......................................... 2,404,994
Gross unrealized depreciation.......................................... (6,265,328)
-------------
Net unrealized depreciation.......................................... $ (3,860,334)
=============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments in securities at market value (identified cost $102,423,397) (Note 1).. $ 98,563,063
Cash............................................................................... 567
Dividends receivable............................................................... 916,831
Interest receivable................................................................ 61,874
Receivable for investment securities sold.......................................... 1,383,026
---------------
Total Assets................................................................... 100,925,361
---------------
LIABILITIES
Accrued expenses................................................................... 36,624
---------------
Total Liabilities.............................................................. 36,624
---------------
NET ASSETS
Applicable to 3,912,574 shares; $1.00 par value; 10,000,000 shares authorized...... $ 100,888,737
===============
Net asset value, offering and redemption price per share
($100,888,737 / 3,912,574 shares)............................................... $ 25.79
===============
SOURCE OF NET ASSETS
Paid-in capital.................................................................... $ 121,071,834
Accumulated distributions in excess of net investment income....................... (205,986)
Accumulated net realized loss on investments....................................... (16,116,777)
Net unrealized depreciation of investments......................................... (3,860,334)
---------------
Net Assets..................................................................... $ 100,888,737
===============
</TABLE>
================================================================================
STATEMENT OF OPERATIONS
9 MONTHS ENDED OCTOBER 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
INCOME
Dividends........................................................................... $ 6,258,401
Interest............................................................................ 541,952
---------------
Total Income..................................................................... 6,800,353
---------------
EXPENSES
Advisory fees (Note 2).............................................................. 503,256
Shareholder services fees (Note 2).................................................. 139,199
Custodian fees (Note 2)............................................................. 31,708
Registration fees (Note 2).......................................................... 30,706
Printing and postage fees........................................................... 24,666
Directors' fees..................................................................... 22,759
Administrative services fees (Note 2)............................................... 22,500
Accounting/Pricing services fees (Note 2)........................................... 19,500
Miscellaneous fees.................................................................. 18,080
Legal fees.......................................................................... 9,984
Taxes other than income taxes....................................................... 6,119
Audit fees.......................................................................... 700
Total Expenses................................................................... 829,177
---------------
Net Investment Income.......................................................... 5,971,176
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments.................................................... 1,739,277
Net decrease in unrealized appreciation of investments.............................. (8,899,237)
---------------
Net loss on investments.......................................................... (7,159,960)
---------------
Net decrease in net assets resulting from operations........................... $ (1,188,784)
===============
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
9 MONTHS
ENDED
OCTOBER 31, YEAR ENDED
1996 JANUARY 31,
(UNAUDITED) 1996
---------------- --------------
<S> <C> <C>
OPERATIONS
Net investment income........................................................ $ 5,971,176 $ 9,610,334
Net realized gain on investments............................................. 1,739,277 2,695,575
Net increase (decrease) in unrealized appreciation of investments............ (8,899,237) 9,893,647
---------------- --------------
Net increase (decrease) in net assets resulting from operations............ (1,188,784) 22,199,556
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income ($1.39 and $1.89 per share,
respectively................................................................ (5,971,176) (9,700,521)
Distributions in excess of net investment income ($.05 and $.03 per share,
respectively................................................................ (205,986) (133,355)
CAPITAL SHARE TRANSACTIONS
Net decrease in net assets derived from the net change in the number of
outstanding shares (a)...................................................... (21,012,803) (17,164,513)
---------------- --------------
Total Decrease in Net Assets............................................... (28,378,749) (4,793,833)
NET ASSETS AT THE BEGINNING OF THE PERIOD..................................... 129,267,486 134,066,319
---------------- --------------
NET ASSETS AT THE END OF THE PERIOD
(including distributions in excess of net investment income
of $205,986 and $0, respectively)........................................... $ 100,888,737 $ 129,267,486
================ ==============
</TABLE>
(a) A summary of capital share transaction follows:
<TABLE>
<CAPTION>
9 MONTHS ENDED
OCTOBER 31, 1996 YEAR ENDED
(UNAUDITED) JANUARY 31, 1996
------------------------------- -------------------------------
SHARES VALUE SHARES VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Shares issued..................................... 188,668 $ 4,908,297 757,154 $ 19,154,193
Shares reinvested from net investment income...... 138,482 3,592,386 239,595 6,039,536
------------- ------------ ------------ -------------
327,150 8,500,683 996,749 25,193,729
Shares redeemed................................... (1,132,643) (29,513,486) (1,676,173) (42,358,242)
------------- ------------ ------------ -------------
Net decrease.................................... (805,493) $(21,012,803) (679,424) $ (17,164,513)
============= ============ ============ =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 (UNAUDITED)
NOTE 1. - Significant Accounting Policies. Stratton Monthly Dividend Shares,
Inc. (the "Fund") is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The Fund's
objective is to seek a high rate of return from dividend and interest income on
its investments in common stock and securities convertible into common stock.
It will seek its objective through investment of at least 25% of assets in
public utility companies engaged in the production, transmission or distribution
of electric, energy, gas, water or telephone services. Due to the inherent risk
of any type of investment, however, there can be no assurance that the objective
of the Fund will be achieved. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The policies are in conformity with generally accepted
accounting principles.
A. Security Valuation - Investments in securities traded on a national
securities exchange are valued at the last reported sales price on the
primary exchange on which they are traded on the valuation date. Securities
not listed or not traded are valued at the mean of the bid and ask price.
Illiquid securities and other securities for which market valuations are
not available are valued by or at the direction of the Board of Directors.
Short-term money market instruments which have a maturity of 60 days or
less are valued at amortized cost which approximates market value.
B. Determination of Gains or Losses on Sales of Securities - Gains or losses
on the sale of securities are calculated for accounting and tax purposes on
the identified cost basis.
C. Federal Income Taxes - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Therefore, no federal income tax provision is required. The
Fund has a capital loss carryover available to offset future capital gains,
if any, of approximately $17,856,000 of which $341,000 expires in 1999,
$13,184,000 expires in 2003 and $4,331,000 expires in 2004.
D. Use of Estimates in Financial Statements - In preparing financial
statements in conformity with generally accepted accounting principles,
management makes estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements, as well
as the reported amounts of income and expenses during the reporting period.
Actual results may differ from these estimates.
E. Other - Security transactions are accounted for on the date the securities
are purchased or sold. Interest income is recorded on the accrual basis and
dividend income on the ex-dividend date. Dividends and distributions to
shareholders are recorded on the ex-dividend date.
F. Distributions to Shareholders - Distributions to shareholders are recorded
on the ex-dividend date. The character of distributions paid to
shareholders is determined by reference to income as determined for income
tax purposes, after giving effect to temporary differences between the
financial reporting and tax basis of assets and liabilities, rather than
income as determined for financial reporting purposes. The Fund has made
certain investments in real estate investment trusts ("REITS") which pay
dividends to their shareholders based upon available funds from operations.
It is quite common for these dividends to exceed the REIT's taxable
earnings and profits resulting in the excess portion of such dividends
being designated as a return of capital. The Fund intends to include the
gross dividends from such REITS in its monthly distributions to its
shareholders and, accordingly, a portion of the Fund's distributions will
also be designated as a return of capital.
NOTE 2. - During the nine months ended October 31, 1996, the Fund paid advisory
fees aggregating $503,256 to Stratton Management Company, (the"Advisor").
Management services are provided by the Advisor under an agreement whereby the
Advisor furnishes all investment advice, office space and facilities to the Fund
and pays the salaries of the Fund's officers and employees, except to the extent
that those employees are engaged in administrative and accounting services
activities. In return for these services, the Fund pays a monthly fee to the
Advisor at an annual rate of 5/8 of 1% of the daily net asset value of the Fund
for such month. The Advisor has voluntarily agreed to waive $15,000 annually of
the compensation due it under the agreement to offset a significant portion of
the cost of certain administrative responsibilities delegated to FPS Services,
Inc. Because of certain undertakings to comply with various state securities
laws, if in any fiscal year the expenses of the Fund (excluding taxes, brokerage
commissions and interest) exceed 2 1/2% of the first $30 million of the Fund's
average net assets, 2% of the next $70 million and 1 1/2% of the remaining, the
Advisor shall reimburse the Fund for such excess. Certain officers and directors
of the Fund are also officers and directors of the Advisor. None of the Fund's
officers receives compensation from the Fund.
The Fund's Transfer Agent, FPS Services, Inc. ("FPS"), is a wholly-owned
subsidiary of FinDaTex, Inc. Certain directors and officers of the Fund are
shareholders of FinDaTex, Inc. FPS received fees of $139,199 for providing
shareholder services, $22,500 for certain administrative services and $19,500
for accounting/pricing services during the nine months ended October 31, 1996.
Pursuant to an agreement between The Bank of New York, (the "Custodian"), and
FPS, the Custodian reallows a portion of its custody fee to FPS for certain
services delegated to FPS. The amount is not readily determinable. FPS Broker
Services, Inc. serves as the Fund's principal underwriter and receives no fees
for services in assisting in sales of the Fund's shares but does receive an
annual fee of $3,000 for its services in connection with the registration of the
Fund's shares under state securities laws.
NOTE 3. - Purchases and sales of securities, excluding short-term notes,
aggregated $39,405,283 and $62,187,520, respectively, for the nine months ended
October 31, 1996.
- --------------------------------------------------------------------------------
9
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
9 MONTHS
ENDED
10/31/96 YEARS ENDED JANUARY 31,
-------------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992
------------ ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..... $ 27.40 $ 24.84 $ 28.69 $ 29.91 $ 27.83 $ 23.02
------------ ----------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
----------------------
Net investment income.................. 1.39 1.88 1.94 1.87 1.94 1.97
Net gains (loss) on securities
(both realized and unrealized)....... (1.56) 2.60 (3.87) (1.14) 2.08 4.79
------------ ----------- ---------- ---------- ---------- ----------
Total from investment operations... (0.17) 4.48 (1.93) 0.73 4.02 6.76
------------ ----------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS
------------------
Dividends (from net investment
income).............................. (1.39) (1.89) (1.92) (1.94) (1.94) (1.95)
Distributions (in excess of net
investment income)................... (0.05) (0.03) 0.00 (0.01) 0.00 0.00
------------ ----------- ---------- ---------- ---------- ----------
Total distributions................ (1.44) (1.92) (1.92) (1.95) (1.94) (1.95)
------------ ----------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period........... $ 25.79 $ 27.40 $ 24.84 $ 28.69 $ 29.91 $ 27.83
============ =========== ========== ========== ========== ==========
Total Return............................. -0.51% ** 18.98% -6.57% 2.22% 15.18% 30.55%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets, end of period (in 000's)... $ 100,889 $129,267 $134,066 $165,798 $98,227 $45,566
Ratio of expenses to average
net assets........................... 1.01% * 0.99% 1.08% 0.99% 1.10% 1.23%
Ratio of net investment
income to average net assets......... 7.25% * 7.42% 7.71% 6.12% 6.74% 7.63%
Portfolio turnover rate................ 50.15% * 53.30% 39.50% 19.15% 35.94% 43.55%
Average commission rate paid........... $ 0.0496 N/A N/A N/A N/A N/A
</TABLE>
______________
* Annualized
** Nine months only
See accompanying notes to financial statements.
10
<PAGE>
SHAREHOLDER INFORMATION
MINIMUM INVESTMENT
- ------------------
The minimum amount for the initial purchase of shares of Stratton Monthly
Dividend Shares is $2,000. Subsequent purchases may be made in amounts of $100
or more.
TELEPHONE EXCHANGE
- ------------------
Shares of Stratton Monthly Dividend Shares may be exchanged by telephone for
shares of the other funds managed by Stratton Management Company, Stratton
Growth Fund, Inc. or Stratton Small-Cap Yield Fund, if a special authorization
form has been completed and is on file with the Transfer Agent in advance.
Exchanges will only be permitted when the securities of both funds involved are
registered in the state of the investor's residence. Stratton Monthly Dividend
Shares reserves the right to suspend the exchange privilege at any time. A
Prospectus of Stratton Growth Fund or Stratton Small-Cap Yield Fund should be
obtained and read prior to making any such exchange.
INCOME DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS
- -----------------------------------------------
Stratton Monthly Dividend Shares expects to make monthly distributions of all
net investment income, and an annual distribution of any net realized capital
gains.
SYSTEMATIC WITHDRAWAL PLAN
- --------------------------
Investors who either own or purchase shares of Stratton Monthly Dividend Shares
having a value of $10,000 or more may elect as another option to withdraw funds
on a regular basis from their account on a monthly, quarterly, semi-annual or
annual basis in amounts of $50 or more.
SHARE PRICE INFORMATION
- -----------------------
The daily share price of Stratton Monthly Dividend Shares can be found in the
mutual fund section of most major daily newspapers as well as The Wall Street
Journal and Investor's Daily, where the Fund is listed under Stratton Funds as
Dividend or Monthly Dividend. The Fund's stock ticker symbol is STMDX.
RETIREMENT PLANS
- ----------------
Stratton Monthly Dividend Shares' IRA, Defined Contribution Plans and 403(b)(7)
Retirement Plans are available at no minimum investment.
11
<PAGE>
GENERAL INFORMATION ON SMDS
- ---------------------------
Requests for a prospectus and financial information, past performance figures
and an application, should be directed to the Fund's "Distributor":
FPS BROKER SERVICES, INC.
3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903
Telephone: 800-634-5726
EXISTING SHAREHOLDER ACCOUNT SERVICES
- -------------------------------------
Shareholders seeking information regarding their accounts and other Fund
services, and shareholders executing redemption requests, should continue to
call or write our "Transfer Agent and Dividend Paying Agent":
FPS SERVICES, INC.
3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903
Telephones: 610-239-4600 . 800-441-6580
INVESTMENT PORTFOLIO ACTIVITIES
- -------------------------------
Questions regarding Stratton Monthly Dividend Shares' investment portfolio
should be directed to the Fund's "Investment Advisor":
STRATTON MANAGEMENT COMPANY
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300, Plymouth Meeting, PA 19462-1050
Telephone: 610-941-0255
ADDITIONAL PURCHASES ONLY to existing accounts should be mailed to a separate
- -------------------------
lock box unit:
C/O FPS SERVICES, INC.
P.O. Box 412797, Kansas City, MO 64141-2797
This report is authorized for distribution to shareholders and to others who
have received a copy of the Prospectus of Stratton Monthly Dividend Shares, Inc.
12
<PAGE>
DIRECTORS OFFICERS
LYNNE M. CANNON JAMES W. STRATTON
Chairman
JOHN J. LOMBARD, JR. GERARD E. HEFFERNAN
President
HENRY A. RENTSCHLER JOHN A. AFFLECK
JOANNE E. KUZMA
FRANK H. REICHEL, III
MERRITT N. RHOAD, JR Vice President
ALEXANDER F. SMITH PATRICIA L. SLOAN
Secretary and Treasurer
RICHARD W. STEVENS JAMES A. BEERS
CAROL L. ROYCE
Assistant Secretary
JAMES W. STRATTON Assistant Secretary
INVESTMENT ADVISOR TRANSFER AGENT AND DIVIDEND PAYING AGENT
STRATTON MANAGEMENT COMPANY FPS SERVICES, INC.
Plymouth Meeting Executive Campus 3200 Horizon Drive, P.O. Box 61503
610 W, Germantown Pike, Suite 300 King of Prussia, PA 19406-0903
Plymouth Meeting, PA 19462-1050 Telephones: 610-239-4600 . 800-441-6580
Telephone: 610-941-0255
<PAGE>
SMDS STRATTON MONTHLY
DIVIDEND SHARES, INC.
<TABLE> <S> <C>
<PAGE>
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