We all have bills to pay. And whether it’s your mortgage, your utilities or just that pesky credit card bill, life’s little expenses tend to recur every month.
There’s just one problem with this: If you’re living off of your investments, you normally get paid on a very different timeframe. Dividends are usually paid quarterly, and bond interest is usually paid semi-annually.
Even if you have a diversified portfolio of bonds and dividend stocks, this schedule is going to make your monthly cash flows lumpy.
I don’t know about you, but I don’t like trying to plan my expenses three to six months in advance. And for a retiree, I can’t think of too many things scarier than running out of money in between quarterly dividend payments.
Well, fear not. I have a solution: Monthly dividend stocks.
Many closed-end bond funds have traditionally paid their dividends monthly, which is nice. It shows that the managers understand their investors and try to accommodate them. But among everyday dividend stocks, it’s still surprisingly rare and usually limited to a REITs and business development companies.
Today, we’re going to look at six solid monthly dividend stocks that can be used to round out an income portfolio.
Monthly Dividend Stocks: STAG Industrial (STAG)
I’ll start with a young REIT that I’ve owned for years, STAG Industrial (STAG). STAG is a small-cap REIT with a market cap of about $1.3 billion. That makes it large enough to be diversified but still small enough to fly under the radar of most investors. STAG switched from a quarterly dividend to a monthly dividend in late 2013.
STAG’s business model is simple enough to understand. The REIT invests in single-tenant industrial real estate — things like warehouses and light manufacturing facilities — that tend to require little in the way of maintenance and ongoing expenses. As of the most recent investor presentation, STAG had a portfolio of 253 properties spread across 36 states and 231 tenants, most of which are investment-grade rated.
More than 60% of STAG’s tenants have revenues of more than $1 billion per year, and the 10 largest tenants collectively only account for 15.5% of STAG’s annualized base rent. That’s a conservative profile, which is exactly what you want from one of your monthly dividend stocks.
After the broad selloff in REITs this year, STAG’s monthly dividend yields a healthy 7.2%. And importantly, STAG has been a steady dividend raiser. STAG raised its dividend 4.5% this year after raising it 10% last year. That’s well ahead of the rate of inflation — something that every retiree should keep in mind.
Monthly Dividend Stocks: EPR Properties (EPR)
Up next is a quirky REIT that I’ve highlighted in the past, EPR Properties (EPR). EPR operates in an interesting niche of the real estate market, focusing mostly on entertainment. (“EPR” is short for “Entertainment Properties.”)
With its collection of non-traditional assets, including movie theaters, golf driving ranges and even charter schools, EPR is hard to classify. Most REITs get lumped into a broad sector, such as residential, commercial or office. There isn’t exactly a category for movie, golf and school REITs.
That’s OK. I don’t need for EPR to fit into a neat category box. I just need it to keep paying its monthly dividends!
In fact, EPR’s quirky asset mix works to our benefit, as it a lot of institutional investors frankly don’t know what to do with it. The lack of institutional buying helps to keep the price low and the yield high. Today, EPR yields a fat 6.8%, and the REIT has been a steady dividend raiser for years. Over the past five years, EPR has grown its dividend at a 6% clip. Not too shabby.
As with STAG, EPR switched its dividend payment from quarterly to monthly in 2013.
Monthly Dividend Stocks: Realty Income (O)
In my view, Realty Income is about as close to a bond as you can get in the stock market. It pays its dividend like clockwork every month, and its cash flows are supported by a rock-solid portfolio of high-traffic retail properties.
This stock has made 542 consecutive dividend payments, and I see nothing short of nuclear war or the actual end of days breaking that chain.
But while I consider Realty Income as safe as a bond, its returns are vastly superior. Since its 1994 listing, Realty Income has enjoyed compounded total returns of 16.4% per year. And it has also raised its dividend for 72 consecutive quarters.
I have shares of Realty Income that I keep in my IRA that I have pledged never to sell. My dividends are set to automatically reinvest, and I never look at the account. (Well, I shouldn’t say “never.” Once a year I login just to make sure nothing is wrong.) I intend to leave these shares to my kids someday, and if they’re smart they’ll do the same for their own children.
I expect Realty Income to still be around by then, and still kicking off a fantastic monthly dividend.
Monthly Dividend Stocks: LTC Properties (LTC)
I’ll add one more REIT to our list of monthly dividend stocks: LTC Properties Inc (LTC).
To get an idea of what LTC does, just look at its ticker symbol: “LTC” stands for “long-term care,” making LTC an interesting way to play the aging of the Baby Boomers. More than 8,000 baby boomers turn 65 years old with every passing day, making this a durable trend with staying power.
LTC is a stock you can buy and forget while enjoying a steady stream of monthly dividends.
LTC Properties has a specialized portfolio of properties targeting skilled nursing, assisted living, independent living and memory care. About 20% of its portfolio is also invested in mortgages backed by these kinds of properties.
LTC currently yields 4.9% in dividends. That’s lower than some of our other monthly payers, though still pretty competitive for a medical REIT. And like our other monthly-pay REITs, LTC has a long history of raising its dividend. LTC recently announced a 5.9% dividend hike, and the REIT has managed an 8.6% dividend growth rate over the past five years.
Also worth noting: Unlike most of the REIT sector, LTC’s stock price is actually in positive territory for the year.
Monthly Dividend Stocks: Prospect Capital (PSEC)
That’s enough about REITs. Let’s take this list of monthly dividend stocks a different direction, starting with business development company Prospect Capital (PSEC)
I’ve been bullish on Prospect Capital for a while now, even making it my entry in the Best Stocks for 2015 contest. With a little less than three months to go, I’m trailing Rave Restaurant Group (RAVE) by 23%. But anything can happen, and I’m certainly not throwing in the towel yet.
As with closed-end funds, business development companies (BDCs) tend to be held by individual investors rather than institutional investors. This goes a long way to explaining why many are monthly dividend stocks. They’re simply giving their investors what they want.
BDCs can be thought of as publicly-traded private equity firms. They supply capital to small and growing companies that need a little more hands-on attention than a traditional bank is willing or able to provide.
Seeing role as good for the economy, Congress gave BDCs a preferential tax regime similar to that of REITs. BDCs pay no taxes at the corporate level so long as they distribute at least 90% of their earnings as dividends. As a result, BDCs tend to be some of the highest-yielding stocks on the market. Prospect Capital is no exception, yielding 13% at current prices.
Today, Prospect trades at a deep discount to book value, something that has only happened a handful of times in the company’s history. Use this as an opportunity. While you’re waiting for the stock to return to a more normal valuation, you get to collect a high monthly dividend.
Monthly Dividend Stocks: PennantPark Floating Rate Capital (PFLT)
I’ll leave you with one last monthly dividend stock: Fellow BDC PennantPark Floating Rate Capital (PFLT).
It’s name is certainly a mouthful, but PennantPark’s business model is simple. It makes primarily floating-rate loans to middle-market companies. Middle-market companies tend to be a little too big for a traditional bank loan but a little too small for a public bond offering. This creates a nice sweet spot for BDCs like PennantPark.
The portfolio is spread across 72 companies with an average investment size of about $5 million. The portfolio is well diversified across sectors, and no single sector accounts for more than 12% of the total. Technology and healthcare account for 12% each.
Like most of the rest of the BDC sector, PennantPark has had a choppy 2015. But today, the shares are very inexpensive, trading at just 86% of book value and yielding 9.3% in dividends.
One other thing to consider: As with Prospect Capital, the vast majority of PennantPark’s portfolio consists of floating-rate loans. So if market yields rise from today’s low levels, PennantPark’s monthly payout should rise right along with them.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long LTC, O, PSEC and STAG. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.