The second half of 2016 was not kind to income investors. As bond yields rose, the prices of virtually everything paying an income stream got slammed. Some of my favorite dividend stocks, REITs and closed-end funds fell by 20% or more … at a time when the broader stock market was rallying.
That’s frustrating, to say the least. But if you’re investing for retirement, short-term price moves really don’t matter all that much. Earning a regular stream of income is far more critical.
But even here, your dividend stocks are generally misaligned with your actual cash needs. Most dividend stocks pay quarterly, and most bonds pay semi-annually. Yet your regular expenses — everything from your mortgage to the mobile phone bill — tend to be monthly.
This is where monthly dividend stocks come in handy. Monthly dividend stocks align your income with your expenses, making it a lot easier to plan out your life. And after the general bloodletting we’ve had among defensive, dividend-paying names over the past few months, some of my favorite monthly dividend stocks are finally reasonably priced again. Most were prohibitively expensive as recently as late summer.
Some would dismiss a monthly payout as a gimmick designed to impress mom and pop investors, but I would disagree completely. To me, a monthly dividend is a sign of a management team that takes its investors seriously and makes a real effort to do what is best for them.
This is an eclectic list, covering everything from traditional brick-and-mortar REITs to leveraged closed-end bond funds. But all have one thing in common: They pay a reliable monthly dividend.
Dividend Stocks to Buy: Realty Income (O)
Dividend Yield: 4.4%
Type: Commercial REIT
You can’t have a list of monthly dividend stocks without “the Monthly Dividend Company” itself, conservative retail REIT Realty Income Corp (NYSE:O). Realty Income has paid its dividend like clockwork for 556 consecutive months and counting. Importantly, it’s raised that dividend for 76 consecutive quarters and has shown no indication of slowing down. Since 1994, the company has raised its dividend at a 4.6% annual clip.
Realty Income is not a bond. It’s obviously a stock. But in terms of stability and safety, it’s about as close to a bond as you can realistically get in the stock market. The REIT owns a portfolio high-traffic retail properties that are mostly recession proof, and importantly, internet proof.
With Amazon.com, Inc. (NASDAQ:AMZN) and its peers quickly making physical stores irrelevant, you have to worry about the long-term viability of a lot of properties. But a typical Realty Income property would be your local pharmacy or convenience store, the sorts of properties that e-commerce won’t replace any time soon. And its base of over 4,700 properties is spread across 247 tenants in 49 states and Puerto Rico, with its largest tenant accounting for just 7.3% of total rent.
At current prices, Realty Income yields about 4.4%, which is nearly 2% higher than the yield on the 10-year Treasury. But unlike that Treasury coupon, which will never rise, Realty Income’s dividend will likely continue to rise every year.
Dividend Stocks to Buy: LTC Properties Inc (LTC)
Dividend Yield: 5%
Type: Healthcare REIT
Another fantastic REIT in our list of monthly dividend stocks is health and senior living specialist LTC Properties Inc (NYSE:LTC).
Lest there be any confusion as to what LTC does, take a look at its ticker symbol. “LTC” stands for “long-term care.” That’s a pretty good description of the REIT’s portfolio, which allocates 49.5% of its weighting to skilled nursing properties with another 45.5% in assisted living facilities. All in all, LTC has over 200 properties spanning 30 states.
Health and senior living might seem like boring niche markets, but LTC is actually a growth dynamo due to the aging of the baby boomers. Over 10,000 boomers turn 65 every single day, and as this generation ages, they will continue to need more and more healthcare. So suffice it to say that demographic trends are on LTC’s side.
At current price, LTC sports a dividend yield of 4.9%. That’s not mouthwateringly high, though it certainly isn’t bad. And LTC also has a good history of raising its dividend, having boosted its payout every year since 2010. Over the past five years, LTC has raised its dividend at 6% annual clip.
LTC isn’t wildly exciting. If fact, I’d argue it’s downright boring. But for a consistent income producer, that’s just fine. LTC is a consistent monthly dividend stock backed by strong demographic trends.
Dividend Stocks to Buy: STAG Industrial (STAG)
Dividend Yield: 6%
Type: Industrial REIT
Up next is a small-cap REIT that I’ve held for several years now, STAG Industrial Inc (NYSE:STAG). STAG is a young REIT, having gone public only in 2011, and like LTC, it operates in something of a niche market. “STAG” stands for “single tenant acquisition group,” and the REIT focuses on standalone, single-tenant properties in the light industrial space. A warehouse or manufacturing facility would be a typical property for STAG.
STAG has grown like a weed since its 2011 IPO, expanding its portfolio 344% to 300 properties in 37 states. And the beauty of its gritty industrial portfolio is that it doesn’t require a lot in terms of maintenance and expenses. There are generally no customers that need to be impressed.
Let’s talk dividends. At current prices, STAG yields just shy of 6%, making it a high-yielder these days. And over the past three years, STAG has grown that dividend by about 11% — not too shabby for a boring portfolio of gritty industrial properties.
My recommendation is to buy STAG, instruct your broker to reinvest the dividends, and then just let it ride. Five years from now, you’ll likely have a much larger share count … and a much fatter monthly dividend.
Dividend Stocks to Buy: EPR Properties (EPR)
Dividend Yield: 5.5%
Type: Commercial REIT
I’ll add one last REIT to our list of monthly dividend stocks, EPR Properties (NYSE:EPR). It must be a “monthly dividend stock thing,” but like LTC and STAG, EPR is also an acronym, standing for “Entertainment Properties.”
EPR’s background is in non-traditional assets, and today the REIT owns an eclectic portfolio that includes movie theaters, golf driving ranges, ski parks, water parks and private schools, among other things. But this quirkiness is what makes EPR attractive.
To start, it requires specialized knowledge to invest in these sorts of properties profitably, and few real estate professionals have it. That gives EPR an advantage and allows it to grab higher yields than it might on a more traditional portfolio. But the non-conformity of the portfolio also tends to be somewhat off-putting to a lot of money managers accustomed to analyzing apartment or office REITs. That tends to depress the price, allowing for us to grab EPR shares at a more attractive price.
Today, EPR yields 5.5% in dividends. And over the past five years, the company has raised its dividend at a 7% clip. That’s not too shabby.
Apart from its attractive yield, EPR is interesting as a portfolio diversifier. The prices of ski parks or movie theaters are not tightly correlated to those of, say, office buildings. So in addition to a great income stream, you also get some real diversification.
Dividend Stocks to Buy: Main Street Capital (MAIN)
Dividend Yield: 7.5%*
Type: Business Development Company
Enough REITs, let’s move on to a different asset class that often includes monthly dividend stocks: business development companies (BDCs). BDCs make debt and equity investments in smaller, up-and-coming companies. Their niche tends to be middle-market companies that are too big to be served by a bank, but too small to access the stock and bond markets. You can think of them as publicly traded private equity companies.
BDCs are actually pretty similar to REITs in that both are special business structures created by Congress with tax advantages. BDCs, like REITs, are not required to pay corporate income taxes so long as they pay out the bulk of their earnings as dividends. As a result, both tend to pay above-market yields, and both tend to be very attractive to retired investors.
So, with that said, let’s take a look at Main Street Capital Corporation (NYSE:MAIN), which is based in Houston, Texas. MAIN makes both equity and debt investments in the companies it finances, and most of its investments are in the fast-growing sunbelt region of the country.
At current prices, MAIN pays about 6%. But that does not include MAIN’s semi-annual special dividends, which are tied to profitability. Adding in the past two special dividends gets the total annual yield to 7.5%.
So, you can think of MAIN as a monthly dividend stock with an extra bonus every six months to incentivize you to continue holding. But given that the regular monthly dividend has grown at a healthy 7.7% clip over the past five years, I’d say we already had reason enough!
*Cumulative total including semi-annual special dividend.
Dividend Stocks to Buy: Prospect Capital (PSEC)
Dividend Yield: 12.1%
Type: Business Development Company
We’ll add one more BDC to the list, and one that I’ve held for a few years now: Prospect Capital Corporation (NASDAQ:PSEC). Prospect hasn’t had as good of a run in recent years as MAIN has. The company was forced to cut its dividend in early 2015, which upset a lot of investors. And because Prospect tends to have a more aggressive dividend payout policy (MAIN’s lower monthly dividend supplemented by the semi-annual quarterlies is a more conservative way to do things), it has less room for dividend growth.
But given the pricing we’re getting, I’m okay with that. At current prices, PSEC yields a fat 12%, and it trades for just 86% of book value. Now, book value is a moving target that changes each quarter based on the value of the investments in the portfolio, and PSEC has some degree of discretion as to how it values it’s portfolio. But even allowing for a modest amount of number fudging, you’re still getting PSEC at a discount to the value of its own portfolio. That means the company is cheap enough to be worth more dead than alive.
As an added sweetener, PSEC’s management team has also been aggressively buying the stock of late. Over the past two years, the management team has collectively purchased over $100 million in PSEC stock on the open market. While that doesn’t necessarily guarantee anything, it does at least tell us that management has skin in the game, and that’s something I like to see.
Dividend Stocks to Buy: Eaton Vance Limited Duration Income Fund (EVV)
Dividend Yield: 7.7%
Type: Closed-End Fund
Another pocket of the market that tends to be ripe with monthly dividend stocks are closed-end funds (CEFs). CEFs are a type of mutual fund that trades on the New York Stock Exchange. But unlike ETFs, which are also actively traded, CEFs have no mechanism for creating or destroying shares. So you often get situations where the share price deviates wildly from the underlying value of the portfolio.
And that’s where CEF investing can get fun. If you can find that proverbial 90-cent dollar (and one that pays a nice monthly dividend), then why wouldn’t you take advantage of it.
This brings me to the Eaton Vance Limited Duration Income Fund (NYSEMKT:EVV), a CEF investing primarily in bank loans, though also investing in bonds, mortgage-backed securities and other income assets. The average duration of its investments is less than three years, so EVV has been relatively insulated by the surge in long-term bond yields that has roiled the fixed-income markets.
At current prices, EVV trades at a discount to net asset value of 9.2% and sports a dividend yield of 7.7%. That would make EVV a very solid addition to any monthly dividend stock portfolio.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long O, LTC, STAG, PSEC and EVV.