With the S&P 500 yielding just 1.85% and the ICE U.S. Treasury 20+ Year Bond Index hardly worth the trouble at 1.75%, monthly dividend stocks may be even more attractive to income investors in 2020 than in years past.
Investors may also perceive monthly dividend stocks as more attractive today because of the spate of cuts and suspensions by S&P 500 companies in the first half of 2020, most of which were delivered by quarterly dividend payers. In the second quarter, all domestic common equities notched a $42.8 billion payout decline and that was after a $5.5 billion drop in the March quarter.
However, some of the asset classes often viewed as fertile territory for monthly dividends are also fertile ground for negative dividend action this year. For example, real estate investment trusts (REITs) had 36 cuts and 26 payout suspensions in the first half of 2020.
That’s not to say all monthly dividend stocks are vulnerable to lower payouts, but some may be. Here are a few that are in potentially precarious spots. It should be noted, though, that these companies have not said lower dividends are in the works.
- Gladstone Capital (NASDAQ:GLAD)
- Sabine Royalty Trust (NYSE:SBR)
- Stellus Capital Investment (NYSE:SCM)
Monthly Dividend Stocks: Gladstone Capital (GLAD)
Yield: 10.26%
Gladstone Capital recently reported second-quarter earnings with the company noting its board of directors approved payouts of 6.5 cents a share for July, August and September. It appears the dividend is safe for now. The board will next meet in October to chart dividend course for the fourth quarter.
Gladstone is what’s known as a business development company (BDC), a high-yielding asset class that often performs well in low interest rate environments. Still, BDCs like Gladstone are inherently risky because these firms make money by lending capital to usually junk-rated, financially strapped mid-sized and small companies.
In a normal climate, there’s default risk with this asset class. But the novel coronavirus is ensuring 2020 is anything but normal for a slew of industries, BDCs included. Relevant to BDCs are constrained access to capital and the potential for elevated borrower defaults amid the Covid-19 pandemic.
“Draws on facilities will yield higher leverage and lower asset coverage cushions, which must be another consideration for management teams when evaluating new origination opportunities in the uncertain environment,” according to Fitch Ratings.
That’s broad BDC commentary there. Specific to Gladstone, the stock isn’t imminent danger of being a dividend offender. But if default rates rapidly spike and the high-yield market becomes constrained, an easy way for this company to conserve cash will be to rein in the dividend.
Sabine Royalty Trust (SBR)
Yield: 8.24%
Sabine Royalty Trust is another example of a high-yielding energy stock, a club that’s growing this year because of the sector’s laggard status. Down 18.46% year-to-date, Sabine isn’t escaping that ominous trend. But in fairness to the company, royalty trusts don’t actually engage in exploration or production of fossil fuels. And the company posted steady dividend payments for several years.
Royalty trusts are pass-through entities, similar to master limited partnerships (MLPs) and REITs. While royalty trusts aren’t exploration or production outfits, revenue and dividends come from production volumes. In a rough oil environment, such as what producers are grappling with this year, it’s easy to cut output and spending to pare costs.
Sabine may not be a dividend offender tomorrow, but investors should heed some words of caution directly from the company.
“During the month of June, the respective shelter-at-home/work-from-home orders across the spectrum of the industry has significantly affected the posting of revenues for the Trust, until the following month of July,” according to the trust.
Stellus Capital Investment (SCM)
Yield: 11.49%
Stellus is a former monthly dividend payer, which is to say the BDC delivered two negative dividend news items this year: a reduced payout and the transition to quarterly from monthly payouts. It’s reasonable to surmise that both moves are aimed at shoring up the balance sheet, a commendable move. Additionally, there’s some evidence to suggest more companies are considering moves to smaller monthly or quarterly payouts while tying bigger dividends to cash flow.
The good news with Stellus is that in the most recent quarter its investment income of 28 cents a share outweighed the dividend of 25 cents. Additionally, the move to the lower dividend is saving the BDC $1.5 million per quarter in dividend expenses. That’s $6 million over the course of a year. This is a meaningful sum for a company with market capitalization of less than $170 million.
A few things to ponder. First and foremost, Stellus isn’t publicly floating the idea of another payout reduction. Second, SCM was rewarded for the capital-preserving moves as it’s more than doubled off its March lows.
Third, some investors were caught off guard by the Stellus payout cut. Fourth, a study by Brandeis University indicates that while many companies cut dividends reactively in response to poor performance, some do so proactively to ward off sour performance. Stellus is in the latter camp, but that doesn’t mean the payout is 100% safe.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
