Use these monthly dividend ETFs as an easy way to plan your income
How would it be to pay your bills every month with the dividends from your portfolio? What would that free you to do if you could count on that income every single month?
Dividend stocks have always been popular on the channel but today we’re covering something even better. I’ll not only reveal the three best monthly dividend ETFs but show you the highest paying dividend funds as well as how to create your own dividend fund from some of the best stocks in the market.
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Monthly Dividends for Constant Income
Nation, living off dividend income has always been kind of a dream of mine. Imagine it, having that cash flow you can count on. What would that mean for you? What would you be able to do more of KNOWING you had that check coming in to pay the bills?
That is financial freedom!
But of course the problem with dividend stocks has always been that the vast majority only pay quarterly, every three months. That makes it tough planning out your bills and how much you can count on from the portfolio.
We’ve talked about monthly dividend stocks on the channel, there aren’t many. Less than 60 stocks pay out that monthly check. But today I wanted to cover a great way to get this monthly cash flow AND a little safety in diversification.
We’ll first look at the pros and cons of monthly versus quarterly dividends. Then I’ll show you the highest paying dividend ETFs, regardless of when they pay, then reveal my three favorite monthly dividend funds. Finally, I’m going to show you how to create your own monthly dividend ETF from a few of the best dividend stocks in the market.
Monthly Dividends vs Quarterly Dividends
So first, does it really matter whether a fund pays a monthly or quarterly dividend? Now I know you’re watching a monthly dividend video so I assume you’ve got a preference but if you’ve got lots of dividend stocks or funds, you’re going to be collecting that cash every month anyway.
Monthly-paying stocks make it a little easier to plan that cash flow if you’re spending your dividends in an idyllic tropical paradise like Cleveland but there’s another way to do this.
Most quarterly-paying stocks tend to declare and pay their dividends in the same month every year. For example, AT&T has paid its dividend in January, April, July and October for decades, without fail. On the other hand, Johnson & Johnson pays its dividend in February, May, August and November.
Finding what months a stock pays its dividend is pretty easy. You can use the Historical Data tab on the stock’s page on Yahoo Finance or just about any investing platform will show you dividends paid on a stock’s chart.
On the other hand, monthly payers may have a stronger commitment to dividends. It’s a big reason investors are in the shares so the Board would never consider a dividend cut and for many, that dividend growth is sacred.
Either way, if you’re going monthly dividends, consider throwing in some really solid quarterly payers as well. And let me know in the comments below, which do you prefer, monthly or quarterly dividends and why? Does it matter to you when a stock pays out, so scroll down and let me know in the comments.
Highest Paying Dividend Funds
Now before we look at those three monthly dividend ETFs, I wanted to highlight some of the highest dividend funds. The monthly dividend funds I found offer some solid yields but we’re talking cash flow of up to 20% a year on these high-paying funds so I couldn’t pass up the chance to share these here as well.
A word of warning though and this really applies to any exchange traded fund you look at, I screened these for ones with good trading volume and assets under management. That AUM is important because some of these smaller funds under $150 million in assets and management has a tough time covering expenses or have to jack up that expense ratio or just shut down. More than one-in-four ETFs have closed since 2014 so this is definitely something you want to watch.
The trading volume isn’t quite as important but you want to know that you’ll be able to buy or sell these shares quickly without taking a price hit or just that there’s investor interest in it.
The first ETF I found was the InfraCap MLP ETF, ticker AMZA, and this one is based on the Alerian MLP index that we talk about so much on the channel. Now this is a closed-end fund and I’m generally not a fan of those. In fact, make sure you watch this video on the hidden fees and leverage in closed-end funds..
But the fund offers a huge 20% dividend yield so it’s one to watch if you’re just looking for those high yields. Now the way the fund works, and this is how most closed-end funds produce those high double-digit dividend yields, is by using leverage on the assets. The fund borrows money to invest or will invest in derivatives like futures and options.
The problem with this is the expense ratio, that percentage of the fund management charges to cover costs, is super-high, about 2.4% on this one compared to a lot of ETFs you can find with expense ratios less than a tenth of a percent or lower. Even some of the monthly dividend ETFs we’ll look at later have high expense ratios but only like 0.6% or so.
But again, it’s tough overlooking that 20% dividend yield and that can make up for the higher expenses and risk in closed funds.
Another one here, the UBS ETRACS 2X Leveraged BDC ETN, ticker BDCL, and its 15.7% dividend yield.
This one tracks the group of Business Development Corporations, or BDCs. Along with real estate investment trusts, or REITs, and Master Limited Partnerships, or MLPs, BDCs are some of the highest-yielding cash flow investments.
BDCs are companies set up to make loans to small- and mid-sized business. Sometimes they’ll make an equity investment in the business and sometimes just invest through bonds. The BDCs themselves leverage up their money by borrowing cheap to lend it out to these businesses…then the fund here is going to use it’s own leverage, so you’ve got a very high amount of risk here.
Besides the leverage used in the BDCs themselves, the way the fund produces a dividend yield two-times what that index pays is it uses options and other derivatives on the stocks. So instead of just buying the stocks to hold in the fund, the BDCL fund will buy call options or something where it can put down half the money and get twice the return.
The problem here, besides again that leverage tends to mean the fund loses more when the market drops, but the expenses involved in daily balancing those options means higher expenses and that the fund tends to underperform the index over the long-run. In other words, even before fees, you might get a strong dividend yield but it won’t be exactly two-times the BDC index over time.
One thing you might consider doing, if you’re going to be investing in multiple funds and stocks, is using a platform like M1 Finance. Those in the Nation will recognize M1 from our dividend portfolio challenge here on the channel and I love the site for its automatic investing feature.
Basically, you pick which stocks and funds you want in your portfolio, turn on the auto-reinvest tool, and M1 is going to automatically invest any deposits, dividends or cash into this group of stocks. It’s going to spread that dollar amount across each of the stocks and funds in the percentages you choose so maybe 5% in each of the stocks and 10% of your money in each of the funds.
It makes it really easy to invest across an entire portfolio, reinvest your dividends automatically and all without ever paying a fee.
Best Monthly Dividend ETFs for Cash Flow
Now let’s look at those monthly dividend ETFs and I’m excited about these because we’ve got some really interested investment strategies in these three funds.
I’ll highlight these three funds then I’m going to show you how to create your own monthly dividend fund and three stocks to start with.
First here is the Global X SuperIncome Preferred ETF, ticker SPFF, and this fund invests in preferred shares with the highest dividend yields.
Now a preferred share is somewhere between stocks and bonds. It’s not a debt obligation like a bond but includes a fixed dividend payment that’s higher than most stocks. Preferreds get their dividend paid out before stockholders so it’s a little less risky and most convert to a regular stock at a certain price.
So preferred shares don’t have quite the upside return as stocks but offer higher yields and the safety of bonds.
The Global X Fund invests in the 50 highest-paying preferred shares and produces a 6% dividend yield against an expense ratio of just 0.6% which is really good for one of these specialized ETFs.
The fund skews a little towards financials and bank stocks because those happen to be the ones that pay the highest yield on preferred shares. You’ve got a lot of big bank names in here like Wells Fargo and JP Morgan along with some smaller names like Ally Financial. The fund has actually produced a 13% total return over the last year so there is some room for price appreciation besides just that dividend yield.
Next is the First Trust Multi-Asset Diversified Income ETF, ticker MDIV, and this is a really interesting all-in-one asset class investment.
The fund invests evenly across five asset classes that typically produce the highest cash flows. These are dividend stocks, REITs, MLPs, preferred shares and high-yield bonds.
The management fee is a little higher here at 0.7% but still lower than any closed-end fund you’ll find and the dividend yield of 6.7% makes up for it. As a bonus on this one, the volatility of the fund, so the measure of how risky the shares are is just 8% compared to 12% on the overall market, that S&P 500 index. That’s a result of the 20% invested in preferred shares which are less risky than stocks and bring that fund volatility down a little.
This next one is a great one, the VanEck Vectors Fallen Angel High Yield Bond ETF, ticker ANGL.
The fund invests in bonds that were issued with an investment-grade rating, so a strong financial rating, but that have been downgraded into high-yield. This is usually on slightly weakening financials or if the company adds more debt but 93% of the bonds in the fund are in the first two risk ratings just below investment-grade, so still fairly safe investments.
What happens is when these fallen angels get downgraded, the price of the bond comes down but it’s still paying that coupon so the interest rate goes up. Since they’re still solid companies, the default rate is low and this group of bonds has outperformed the broader high-yield index in 11 of the last 15 years.
The fund itself has produced an 8.4% annualized return since 2012 which is really good for a bond fund and pays a 5.2% dividend yield. The expense ratio is just 0.4% and again, these are bonds of good size companies like Sprint and Freeport McMoRan.
Almost three-quarters of the fund is in bonds of U.S. companies with the rest in developed nations and it’s well diversified across sectors as well with bonds from companies in nine sectors.
How to Create Your Own Monthly Dividend
Now these monthly ETFs are really interesting and they’re not quite as expensive as the specialized funds we saw first, but you’re still looking at a fee of $4 for every thousand you have invested even on that cheapest bond ETF. So I wanted to show you how to create your own monthly dividend ETF through individual stocks.
I’ll highlight three dividend stocks to put on your radar below but anytime you get 20-plus stocks in a group, you’re going to diversify out any company-specific risks and smooth out your portfolio. And by being able to pick your own dividend stocks, whether they pay monthly or quarterly, you’ve got the opportunity to get the very best out there.
Realty Income, ticker O, is easily the most popular REIT and maybe one of the most popular of all stocks with its 3.6% dividend paid on a monthly basis.
Realty Income has 50 years of operating history and owns nearly 6,000 properties in 49 states, Puerto Rico and the United Kingdom.
Even though 83% of rental revenue is from retail, I’m OK with this one because its diversified across some of the safer types of retail property like convenience, dollar stores, drug and grocery. Lease terms average nine years and occupancy has never been below 96% for the properties. Rent growth isn’t terrifically strong at around 1% annualized but it’s consistent and supports the dividend.
That dividend isn’t the highest among REITs but investors love the monthly payouts and the company has reported 88 consecutive quarterly increases. The 4.5% annualized dividend growth has beaten the 2.9% average for REITs so expect this one to keep paying.
New Residential Investment, ticker NRZ, is a REIT I just had to look up after doing another video on REITs and getting dozens of comments about the stock.
New Residential pays a 12% dividend yield but it’s not like other mortgage REITs that just borrows short-term and buys mortgage investments. NRZ actually originates and services the loans so it’s more like a mortgage company.
Shares have been trading since 2013 and have returned over $3 billion in shareholder dividends since then. Now while I like the stock at first glance, I do want to talk about an issue I found researching it.
In the most recent investor report, management makes a point to talk about how the non-qualified mortgages, a product that accounted for as much as 19% of the loan mix in Q4 2018, they went through a lot of effort pointing out how these loans are NOT sub-prime. How the loans are just borrowers that don’t qualify for traditional mortgages like the ones guaranteed by Fannie Mae or HUD.
Now the old equity analyst in me would be all over this. One of the tricks I used to use was watching management’s language in reports and news releases, watching when they called out a part of the business as improving or not as bad as the market thought…because it was usually exactly this part of the business that ended up causing trouble. Basically, in a lot of these instances, management is trying to play a little slight of hand, distract investors from the big issues by saying it’s not so bad or they’ve fixed it.
Not saying this is what’s happening with NRZ and they’ve cut the product mix in that Non-Qualified portion to just 8% in the last quarter. I love the high yield on this but if you’re going to invest, this is definitely one you have to read the investor reports and keep up with.
Our cash flow machine here is Altria Group, ticker MO, with a 7.2% dividend yield.
Shares of Altria have been under pressure for the last couple of years on disappointment over its e-cigarette acquisition Juul but the assets have been written down and it could be ready to trade on a more stable footing.
After the 2008 split, Altria is solely focused on the U.S. cigarette and smokeless market which means it’s much less at risk to the volatile international market. While tobacco use is in decline in the U.S., it’s a very slow rate less than a few percent a year and pricing power keeps sales fairly stable.
One catalyst for the shares, besides the valuation which we’ll get to, is its 10% ownership of Anheuser-Busch which gives it a little growth into that global beverages market.
Shares trade for 11.3-times earnings which are expected higher by almost 5.8% over the next year. This one has fallen well past the point of value and has traded consistently around 13-times earnings which could put it at $57 a share over the next year.
In fact, analysts have the shares around $44 on the low end and up to $68 per share at the high end.
It takes a little planning; looking at which months each stock pays its dividend and investing so you collect a dividend check each month but you can adjust the portfolio as you go. If you find that one month is light on dividends or you’ve got more bills, like in December, then you can add some December payers to smooth out your cash flow.