Income Expert Eyes Monthly Dividends

12/03/2019 5:00 am EST

Focus: STRATEGIES

Tom Hutchinson

Editor, Cabot Dividend Investor

Dividend stocks are about the only game in town to generate a decent income. Many people rely on dividend income to live in retirement, notes Tom Hutchinson, editor of Cabot Dividend Investor.

But there’s one small problem. The overwhelming majority of dividend stocks only pay quarterly, and bills come every month. Thus, owning a few of the best monthly dividend stocks is a nice alternative.

I scoured the investment universe to find securities that not only pay every month, but are good long-term investments as well. Here are three.

Realty Income Corp. (O)

To just say that this real estate investment trust pays monthly income doesn’t cut it. This company is so good at paying monthly income that they have the audacity to call themselves “The Monthly Dividend Company.”

Realty Income has paid 592 consecutive monthly dividends, dating back to 1970, without a decrease. That dividend has also increased 103 times and for 44 consecutive quarters. That’s what I call a stable and growing dividend. But it’s more than just the dividend. Since the IPO in 1994, the stock has provided an average annual return of over 16%.

The REIT invests in a vast portfolio of over 5,900 retail properties with 274 tenants in 49 states secured with long-term contracts. The largest tenants include Walgreens, 7-Eleven and FedEx.

A key part of the contracts are triple net leases, where the tenants pay taxes, insurance and maintenance expenses. This reduces unpredictable costs and provides a reliable revenue stream.

It works. A $10,000 investment 10 years ago would be worth over $48,000 today if you reinvested the dividends and over $39,000 even if you took the income every month for 120 straight months. The stock currently yields a solid 3.56%.

Main Street Capital (MAIN)

Business development companies (BDCs) are a special class of investment, along with REITs and MLPs, that are tax advantaged. These companies pay no income tax at the corporate level provided they pay out the bulk of earnings to investors in the form of dividends. BDCs generally pay a higher yield than regular dividend stocks because they pay out money normally lost to taxes.

BDCs lend to up-and-coming companies that need cash to expand. Congress granted special tax status years ago to encourage small business development, an area underserved by banks and traditional lenders without the required expertise and risk tolerance. The problem is that these BDCs have for the most part been lousy investments.

The VanEck Vectors BDC Income ETF (BIZD), which tracks an index of BDCs, has vastly underperformed the market in every measurable period over the past five years, delivering a -16.47% loss over five years. But there is a rare gem in the group that stands out — Main Street Capital.

MAIN has actually outperformed the market over the past five- and 10-year periods as well as year-to-date, providing a better than 16% average annual return over the last decade. The BDC targets middle market lenders with a twist. It focuses on smaller companies within that market where there is less competition and higher returns.

Main Street Capital also makes high interest loans and takes equity stakes in promising companies in a wide range of industries. Consequently, it is able to not only pay a high dividend but provide capital appreciation too. It also has the advantage of in-house management, which reduces fees and gives it better margins than its peers.

MAIN currently yields a very impressive 5.86% with regular monthly distributions, as well as periodic special dividends. Despite the fact that it invests in start-up companies it has a beta of just 0.8%.

STAG Industrial (STAG)

STAG Industrial is a REIT that acquires and operates single-tenant industrial properties. The vast majority of the portfolio is comprised of warehouse and distribution buildings. It’s a very good business because these properties are very profitable and demand for these industrial properties exceeds the current supply.

The properties are bare bones and low maintenance because, unlike people, boxes aren’t fussy. Warehouse and distribution centers are basic shells that are cheap to operate.

At the same time, demand is through the roof. As online shopping continues to proliferate, more and more of these industrial properties are required. And STAG is right there.

The stock has been a consistent performer in good and bad markets, with significantly less volatility than the overall market and an average annual five-year return of 19%. The stock, of course, pays regular monthly dividends with a current yield of 4.7%, and the strong demand should keep the payments flowing for years to come.

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