Cash flow every month with these dividend stocks and ETFs
The stock market crash means dividend cuts and falling stock prices, so how do you know which dividend stocks are going to survive? How do you put together a dividend portfolio that will not only keep that cash flow coming but eventually rebound for double-digit returns?
In this video, I’ll show you how to build a monthly dividend portfolio and reveal eight stocks to put on your radar right now.
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Quarterly vs Monthly Dividends
Nation, we’ve just been through the worst market crash in more than a decade and we’re still dealing with what could be the worst recession in almost 100 years. Tens of millions are unemployed and it took the market less than a month to lose a third of its value.
That cash flow from dividends has never been more important whether to help you pay the bills or just reinvest and take advantage of these lower prices.
But with most dividend stocks paying only every three months, you’re left scrambling for cash eight months of the year. Even with a portfolio of dividend stocks paying in different months, you’re still going to come up short.
So I wanted to put a portfolio together exclusively of monthly dividend stocks. Companies with a history of returning cash flow to investors that will produce that dividend payment every single month.
Now the problem investors run into looking for dividend stocks is the vast majority of monthly payers are either real estate, business development corporations or master limited partnerships in the energy sector. If you’re just looking for monthly dividend stocks, you’re going to end up with a portfolio heavily weighted in these three areas and you’re going to see it crumble in a market crash.
Diversification with Monthly Dividend ETFs
That’s why I’m starting our portfolio with five monthly dividend ETFs, five dividend funds that are going to give you access to a huge mix of stocks, bonds and other assets. It’s through these funds that you’ll get safe cash flow and returns, then I’ll add three of my favorite monthly dividend stocks for upside return.
First here is the Global X SuperDividend ETF, ticker DIV, which holds 50 of the highest dividend yielding stocks in the market and pays a 14.4% yield.
What I love about the dividend stock funds we’ll cover is they invest in those quarterly dividend payers but manage their cash to produce a monthly dividend to investors. In effect, they’re doing the work for you, investing in the very best dividend stocks but turning the portfolio into a monthly cash machine.
The fund investments are spread across 14 industries though there is some heavy exposure in a few of these. So we’ve got a lot of weight on those MLPs and mortgage REITs which haven’t done well over the last few months but could be primed for a rebound. Even as those few lagging industries have come down though, the fund is diversified enough within these safety sectors like consumer staples and telecom to still produce that dividend.
The next fund I’m adding is the iShares Preferred and Income Securities ETF, ticker PFF, which holds preferred shares of 489 companies and pays a 6.3% dividend yield.
I really like preferred shares during this stage of the economy and it’s one of Warren Buffett’s favorite strategies as well. Preferred shares are a higher class of stock issued by companies with a guaranteed dividend that gets paid out before ordinary stockholders. These shares are first in line after creditors in a liquidation and can be converted into regular shares if the stock jumps higher.
So these preferred shares are safer in or leading into a recession because they have a higher right to assets. While the dividend can be paused, preferred shareholders will get all their back dividends owed before regular stock dividends get a dime.
These are the investments Warren Buffett used when he bailed out the banks in 2009, buying billions in preferred shares in banks like Wells Fargo.
Almost half the fund is in banks and diversified financial companies but a lot of that is a function of the fact that these financial companies just happen to use preferred shares more than other sectors. You also get good exposure to these other sectors like utilities, real estate and six other industries.
Shares of the preferred ETF are down just 14% this year against that 20%-plus drop in the market, so definitely providing that safety we need in this crisis.
The WisdomTree U.S. Small Cap Dividend Fund, ticker DEF, produces a little lower dividend at just 4.5% but a lot more return upside than the others in the list.
This is really a rebound play on top of those dividends. When the economy does snap back, it’s going to be these smaller, faster-growth companies that will provide those double-digit returns. In the mean-time, you get a dividend yield that’s more than twice the stock market average to wait it out.
The WisdomTree fund invests in small-cap U.S. companies, so those generally with a market cap under $1.5 billion. It’s got a little over half of shares in these top three sectors; financials, industrials and real estate, but no company is more than 1.4% of the portfolio so I’m not quite as worried about weightings here.
What I would suggest, and everyone in the Nation has heard me talk about this, is that whenever you’re investing in funds and stocks, add up the entire portfolio exposure to each sector.
This means going through each fund you own and adding up how much you have in each sector. So if you have $100 in a fund that holds 25% of its assets in financial companies, and you have $100 in another fund that holds 10% of assets in financials; then you’ve got 17.5%, that’s $35 out of $200 total investment, in financial companies.
And why this is important because you don’t want more than maybe 15% or 20% of your total portfolio in any one sector of the economy. There’s just too much risk there that if something happens to that sector; like maybe rock-bottom interest rates hit financials, then you don’t want it to destroy your entire portfolio.
So make sure you know how much exposure you have to each sector across all your funds and individual stocks. If you find you have more in a particular sector, maybe add another fund or some stocks with assets in those other sectors to balance it out.
Next in our dividend funds 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 9.5% 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 one of my favorites right now, 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 6% 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.
So with just these five funds, you’re at an average 8.1% dividend yield plus some great upside potential on those small cap stocks and the multi-asset fund.
In fact, that could be your whole portfolio right there, that safety in diversification, the upside potential and the eight-percent plus dividend with the check coming every single month.
Finding the Best Monthly Dividend Stocks
But I wanted to add three more picks to the portfolio, three dividend stocks for higher return potential but still that monthly payout.
First though, I want to show you what I’m looking for in these stocks. Those of you in the community know, I’m not about to just drop a list of stock picks in your lap. I want you to know how to look for these stocks, what to watch so YOU become a better investor.
Here I’m looking for companies with a strong dividend yield but not at the risk of cash flow problems. You’ll see in a lot of high yield stocks, the company is keeping nothing back in cash flow so that liquidity is a constant threat. Instead, I want companies that are able to keep up that dividend but also reinvesting into the business for growth.
I’m generally going to be looking for larger companies, ones with a market cap over $3.5 billion though I’ll break this rule on one of these stocks. Basically, I want to make sure the companies have that financial power and size to survive the recession no matter what, companies that are going to have that access to credit if they need it.
Finally, I’m also going to dig into the annual 10-K report, the annual financial report, to find the schedule for debt maturities. Here I want to avoid companies with large chunks of debt maturing this year that needs to be refinanced or paid off. Most of these companies are large enough and in a good enough financial position that they’d be able to refinance that debt easily but it’s just one less thing they have to worry about.
Of course, I’m also looking for companies with a yield of 5% or higher and that pay out on a monthly basis. The overall market averages around a 2% yield so these stocks are paying more than twice the market average.
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My Three Favorite Monthly Dividend Stocks
Our first monthly dividend stock is a long-time favorite, Shaw Communications, ticker SJR, a Canadian telecom giant paying a 5.8% yield.
Now Shaw has historically been a wireline business but the acquisition of Wind Mobile in 2016 is starting to come through with some real growth and making wireless the company’s biggest profit center. The company is investing in network improvements with deployment of 700 and 600 MHz spectrums it acquired in recent auctions and really becoming a player in the wireless market.
Shaw has $130 million on the balance sheet and no debt maturities until 2023 so definitely the financial strength we’re looking for and the business isn’t something that’s going to take a big hit in the shelter-in-place environment so first and second quarter earnings might actually be pretty decent.
We’ve got price targets from seven analysts here with targets from $16.90 on the low end, right around where it’s trading at now, to 38% higher at $22.53 per share over the next year so a great dividend and that upside return potential.
I’m breaking my market cap rule here with $300 million Gladstone Investment Corporation, ticker GAIN, and its 9.6% dividend yield.
Gladstone is a business development corporation, a BDC, for what’s called middle-market companies. These are U.S. companies with earnings in the range of $3 to $20 million, so not quite big enough to list on the market but still big enough to need more credit and funding than can be provided by a traditional bank.
Basically, BDCs like Gladstone are a mix of an investment bank and a venture capital firm because they provide both debt funding and equity investing into these companies.
And why I like GAIN here is because it takes a higher equity share than most other BDCs. Gladstone’s target investment is 25% equity and 75% debt versus a traditional BDC that will look for less than 10% equity in the companies it works with. That higher equity ownership might mean higher risk but it’s also going to mean higher returns on these investments.
And we see that in GAIN’s history of return on equity which is well above the industry average. The five-year average ROE of 17% is over three-times the median ROE for the BDC group and even though near-term return has come down, it’s still well above the average for the group.
Gladstone’s current portfolio is spread across 28 companies in 14 industries so a level of diversification there that should help it continue those returns even in a sluggish economy.
Our third monthly dividend stock is STAG Industrial, ticker STAG, a real estate investment trust with a 6% yield in one of my favorite property types.
STAG owns 450 buildings in 38 states and 91 million rentable square feet, and it’s in that industrial, warehouse space.
The rise of ecommerce and online shopping has destroyed the retail property market but all those online orders need to be stored somewhere and that’s meant a boom in warehouse demand. In fact, 43% of the STAG’s property portfolio is involved in ecommerce activity.
No tenant accounts for more than 2% of the company’s total rent revenue, so the odds of a tenant failure vacating lots of space is zero. Shares trade for just 13-times funds from operations so a solid value-play here and the company only has $300 million in debt maturities this year and next.
We’ve got price targets from four analysts here with estimates for $24 a share at the low end to as high as $35 a share over the next year.
Again, I'd caution you from investing exclusively in monthly dividend-paying stocks and funds. Create that monthly dividend stream with a few of these investments but then add some of those quarterly dividend stocks as well. You'll get a much bigger selection of stocks and quality cash flow.