One of the first things a novice investor does is load up on dividend stocks. But I think it’s a wise strategy, even for experienced investors. We all should value safety and security, especially after the novel coronavirus pandemic sent the stock markets back by $5 trillion earlier this year. That’s why you see increased interest in monthly dividend stocks over growth stocks – those expected to grow faster than an average company in the sector.
But dividend stocks are not iron-clad guarantees. Businesses operate in fluid situations. So, even if you picked a stock thinking that it offers a stable, secure income stream, you could be in for a rude awakening if the revenues are drying up.
There have been several instances where companies have given dividends to placate their investors because they offer little concerning earnings growth and long-term profitability. So, I understand that investing in monthly dividend stocks can be a bit confusing.
That’s where this list can come in handy. It tells you about three monthly dividend companies that are in trouble because of the prevailing conditions:
Monthly Dividend Stocks: Apple Hospitality REIT (APLE)
We start the list with a real estate investment trust, traditionally considered one of the safest investments possible. Just a quick tidbit first to qualify as a REIT, a company must give at least 90% of its taxable income to shareholders yearly in the form of dividends.
Apple Hospitality REIT maintains a portfolio of mostly hotels across several geographies, with room rates on the budget end. In the latest quarter, the REIT reported $148 million in revenue, up 58.5% sequentially from $81 million but is down substantially below the prior-year figure of $332 million.
Funds from operations (FFO) were back in positive territory at 4 cents per share, a big jump from the 11-cent loss it posted in the second quarter. Occupancy levels have now stabilized around 50% since August.
APLE halted its dividend ever since the Q1 distribution of 10 cents per share was paid on March 16. And even though the company is in better shape than it was at the start of this crisis, the pandemic is far from over. The REIT is also very conscious that it needs to work on capital preservation and liquidity.
Hence, even though the company has become cash-flow positive sooner than expected, I wouldn’t expect a dividend reinstatement soon. It has already said that it will not pay dividends for the remainder of 2020 unless required to maintain its REIT status for federal income tax purposes. If that sounds grim, I have another reason to dissuade you from investing in APLE stock.
Covid-19 cases are on the rise. And with President-elect Joe Biden taking the White House, a national lockdown is not out of the question. That’s bad news for the monthly dividend.
EPR Properties (EPR)
Our second entry on the list is also a REIT. EPR Properties is based in Kansas City, Missouri. It invests in amusement parks, theaters, and ski resorts. REITs are already among the hardest hit sectors in general. But EPR’s portfolio makes it doubly hard to mount a recovery. It is uniquely exposed to lockdowns.
Under normal circumstances, the company has a high-quality portfolio that has assets across several industries. Unfortunately, the pandemic is a perfect storm situation that has directly impacted its returns. Cash flow is down, while leverage is up. As a result, EPR stock is down almost 60% year to date.
In the longer term, I believe debt will be a significant issue for the company. It has until April to avoid default on its obligations after having secured debt covenant waivers. That should give it some breathing room, but the upside remains limited for the stock at this point. Unless movie theaters and amusement parks start to see some footfall once again, it will be a long slog for the company from here on.
Movie theatres were already struggling due to the rise of on-demand movies through platforms like Netflix (NASDAQ:NFLX). The current crisis has just exacerbated the situation. Big-ticket movies like Tenet have failed to get audiences back into theatres. And many insiders are particularly worried regarding the future of the business.
Like APLE, EPR is also not currently paying a dividend. The chances of a dividend reinstatement are slim, with the company suffering on so many fronts. However, expect the company to pay just enough to maintain its REIT status.
Prospect Capital (PSEC)
Our final entry on the list is thankfully not a REIT. Prospect Capital offers private debt and private equity to middle-market companies in the United States. No surprises that it is struggling amidst a low-interest environment. PSEC stock is down almost 22% this year. And it doesn’t look like the pain will stop anytime soon.
What a difference a few months can make. Private equity ruled the roost last year, having amassed $1.45 trillion in “dry powder,” or cash, to invest at the end of 2019. And then Covid-19 struck.
Many of the companies that had taken money from private equity firms are now staring down the barrel. Naturally, this places a lot of pressure on the latter and their investment income streams. At this point, we don’t have a solid number as to how many of PSEC’s clients are in trouble or are facing liquidity issues. But it’s safe to assume that the number will be fairly high. In Q1, the company reported negative operating cash flows for the first time in several years.
As of this writing, Prospect Capital pays an annual dividend of $0.72 per share, with a dividend yield of 13.90%. Considering the circumstances, I would not put it out of the question that a dividend cut is around the corner.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.