Find the Best Monthly Dividend Stocks with the Highest Returns and Never Think Twice
Nation, a few weeks ago I showed you the seven monthly dividend stocks I use for constant cash flow and it immediately jumped to the third most popular video on the channel with over half a million views.
We’ve talked about the highest yielding dividend stocks and the safest so I know you love getting those dividend checks as much as I do…but there’s an extremely important piece missing!
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You see, the highest yielding stock might not be the best for your portfolio, in fact you could actually lose money if the stock price falls or if the dividend is cut. Investors get dollar signs in their eyes for those double-digit yields but the real profit is in total return…the stocks that make you the most on price AND dividends!
In fact, this is so important for dividend investing, I wanted to add the video to our Ultimate Stock Picker series. I’m going to show you why total return is more important than dividend yield. I’ll take you step-by-step to finding the best monthly dividend stocks with the highest returns. Then, I’m going to countdown through the seven top dividend stocks by return and one that has more than doubled your money in the last five years.
The video is part of a four-part series in partnership with The Motley Fool to help you get started investing. I’ll be putting all four videos into a special playlist on the channel called ‘Ultimate Guide to Start Investing.’
As a bonus, I’m going to help get you started with a free report, The Top 5 Stocks in My Own Portfolio! These are the five biggest stock positions I’m holding, stocks to benefit from the biggest trends over the next decade.
It’s an exclusive report only available through the link I’ll leave in the video description below. I won’t be sharing these in a video so click through and get your free report.
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Best Dividend Stocks to Buy for Growth
We’re getting started on the countdown for those best monthly dividend stocks but first, I want to put this to the test and see where the community is at. Look in your portfolio and find the stock with the highest dividend yield, then find the price return over the last five years…so for example, for my shares of STAG Industrial, ticker STAG, the shares pay a dividend yield of 4.2% annually but here if I click on the five-year chart, I can see the share price has grown by 47% over the last five years…adding to that annual return. So scroll down and let me know in the comments below, what is your highest yielding dividend stocks and what is the price return over the last five years?
Our first monthly dividend stock is one I use to pay my rent every month, Prospect Capital, ticker PSEC, with a 9.4% dividend yield.
And now before I show you why I like Prospect, all you out there in the Nation know I’m a numbers nerd so I gotta get a little technical and show you how I’m calculating that total return.
Now you can just eyeball the stock chart so looking at the share price over the last five years but that really doesn’t show you the true return including dividends. So what I want to do is click over to this Historical Data, then we’ll change the time frame to the last five years, and then over here to just show monthly data to make the table a little more manageable and click Apply.
Now we see the share price for each month and the dividends and what you want to pay attention to is this column labeled Adjusted Close. That’s the stock price adjusted for any dividends and splits, so it’s giving you that stock price minus the dividends investors collected.
And if we scroll all the way down here through the five years and find that adjusted price, so five years ago shares of Prospect Capital were priced at $7.82 a share but if you held them over that time, you would have collected all those dividends so it’s like you only paid $4.38 a share.
So to find the actual total return here, you take the current price at $7.85 a share and divide by that adjusted price, the $4.38 each for a 79% return over the five years.
Now just one more step to see how much that is per year and here’s where it gets a little nerdy…
[Math rules yo!]
So you’ve got the five-year return, to find the annual return you just go over here to this little X with the y above it, that’s your number with an exponent, tap that and then go point-two…because each year is a fifth or 20% of that five-year period, and we get a 12.3% annualized return for Prospect Capital.
Now, if you haven’t clicked out and you’re not sleeping then you’re my kind of people but I promise, it’s not as hard as it looks. Really, you can just look at that total five-year return to compare your dividend stocks without doing the fancy annualized stuff but I wanted to give you the tools to do this on your own.
Anyway….[what were we talking about again?]
Yes, Prospect Capital is a business development corporation, so it makes loans and invests in mid-sized companies and has paid dividends for more than 16 years. The company manages a $5.7 billion portfolio of 122 investments in companies across 39 industries and earns a 9.9% yield on its portfolio. That’s more than enough to cover the stock’s dividend yield and has helped it produce that double-digit return each year.
In fact, Prospect has returned a cumulative $18.60 per share in dividends for more than $3.3 billion since the 2004 IPO and that payout keeps climbing. That’s the purpose of these BDCs is to act as a bank and investor to mid-size companies, manage those assets and then return 90% of earnings as cash flow to you the investor.
So see, if you were just eyeballing the share price for Prospect, it doesn’t look like much of a return and you would have missed out because you didn’t have those math powers!
Second on our monthly dividends list is another favorite of mine, STAG Industrial, ticker STAG, with its 4.2% dividend yield.
Now unlike Prospect Capital, STAG doesn’t pay a huge monthly dividend at a yield just over four percent but what it lacks in cash flow it makes up in price return. Shares of STAG have produced a total return of 13.7% annualized over the last five years and there’s good reason to believe it can keep producing.
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.
And here is a good time then to talk about why total return is just as important as a high dividend yield when you’re looking for monthly dividend stocks.
Now I get it, we all love seeing that double-digit dividend yield, you see a 15% dividend yield and it’s like hypnotizing…YOU MUST BUY THIS STOOOOCCCKKKK
But then you buy it and the share price falls so much that it wipes out your return. Investors in San Juan Basin Trust, ticker SJT, actually lost a third of a percent annually over the last five years…and that’s including the 15% dividend yield.
So total return is important just to know what you’re getting in the stock but also to get that balance between growth and dividends for your portfolio. A lot of the stocks on our list may not pay the highest monthly dividend but they produce a great return that grows your portfolio so you’re collecting more dividends in the future.
You get to grow your nest egg and get higher cash flow…I don’t know what’s better than that. Maybe…well, it’s a family channel so we won’t get into that.
Counting down, five on our monthly dividend list is Global Water Resources, ticker GWRS, and I was actually a little surprised at this one.
Now Global Water only pays a 1.8% dividend yield but got on our list for its 16.5% total annual return over the last five years, a perfect example of a lower yield stock that can really pay off.
The company is a water resource manager that owns and operates water, waste water and recycled water utilities…so it’s a water utility company. And if that doesn’t sound like a growth industry, the company operates in Phoenix, Arizona…which if you’ve ever been to Phoenix, you know water is like gold there!
Global Water has grown its dividend by 22% over the last five years so some growth there and solid price returns as well.
Here’s a higher dividend for you, Stellus Capital Investment Corporation, ticker SCM, with an 8.06% dividend yield.
Stellus is another Business Development Company, and you see a lot of these as well as real estate companies and MLPs paying monthly dividends because they’re set up for that cash flow. In fact, including that solid dividend, the shares here have produced a 16.7% annual return over the last five years.
Stellus manages $1.7 billion in assets with more than 270 loans since 2004 and has paid a total of $11.08 in dividends. The company specializes in those liens and debt financing to mid-size companies with five to $50 million in EBITDA earnings and this is what you like to see in a BDC’s portfolio, spread out across many industries and geographically so failure in a specific industry or state isn’t going to bankrupt the company.
Only 7% of the company’s loans is fixed rate which is good as we see inflation and interest rates head higher. Most of the loans are first lien, so fairly safe and another thing you want to watch for in Business Development companies is the weighted average yield on loans, that’s the average interest rate the company is collecting. We see here, all these are at or above the company’s dividend yield which is important as a sign of dividend sustainability.
We’ve still got three more monthly dividend stocks to highlight including my favorite that produced a 138% return over five years but all you out there in the Nation know, I’m not about to just drop a few stock picks in your lap. I want to give you the tools to do this yourself so here I want to give you three things to watch for when picking dividend stocks.
First as we’ve talked about, you want to think of the total return instead of just focusing on that dividend yield.
Now this isn’t a hard-fast rule and you can balance return and dividends depending on your preference. If you want that higher immediate cash flow even if the stock might produce a little lower return over the long-term then go for it. You’re the squirrel and it’s your world.
Even if you do want that higher yield, still go through the steps to check out the stocks total return, just so you know what to expect.
Second here, and so important, is checking the stock’s dividend sustainability through either the payout ratio or distribution coverage.
This is going to tell you how likely it is the company can keep paying the dividend or even grow it over time. The payout ratio is the percentage of a company’s earnings it’s paying out to cover that dividend. So if a company is paying out most of its earnings, it might not be holding enough back to grow the business or just stay competitive and that could eventually affect the dividend.
You find the payout ratio by taking the annual dividend amount, for example you see here that AT&T pays an annual dividend of $2.08 per share, then you divide that by the earnings per share reported over the last four quarters. So AT&T reported $3.20 in earnings which means it’s paying out 65% of earnings for the dividend.
To get an idea if that payout ratio is dangerously high or not, you can compare it with other dividend stocks in the industry or with what the company has paid out in the past. And besides avoiding risky dividends, this is also a great way to find monthly dividend stocks that might be able to increase the payout, if the payout ratio is low enough that the company can boost the dividend.
Now that’s for dividend stocks set up as corporations, because MLPs and Business Development Corporations are structured a little differently, here you want to use what’s called the distribution coverage ratio.
And the idea here is basically the same, it’s just the percentage of cash flow the company is paying out for that dividend but it’s measured a little differently. Most of these companies; the BDCs, REITs and MLPs where you’ll need to compare this ratio, they’re going to calculate it for you and show you on the financial reports.
Third here before we get back to our monthly dividend list is looking for stocks with increasing payments.
Now if you’ve looked for stocks on those other two factors then you’ve probably got a stock increasing it’s dividend payouts as well but it’s just good to double-check. Most investing apps or sites will show you the dividend history of a stock, or the company’s investor relations page will show it, so just scroll through to see if the company has consistently raised its payment amount.
The Gladstone Land Corporation, ticker LAND, is another one with a smaller dividend yield but a strong total return.
The company is a farmland and real estate trust with 137 farms and over 100,000 total acres in 13 states. The land is leased to farmers on a triple-net basis which means the tenant pays all costs and the trust just collects the checks!
Maybe I’m a little biased as an ol’ Iowa boy but farmland is a great investment. Even as the world’s population and food demand has boomed, farmable land per capita has shrunk from 0.8 acres per person in 1980 to almost half that, just half an acre per person last year.
We’re trying to grow more food on less land. It’s driven crop prices and the NCREIF Farmland Index has produced an annualized 12.3% return over the past two decades.
For its part, Gladstone Land has produced a 17.3% annualized return in the last five years including the 2.4% dividend yield.
Now the SPDR Barclays Convertible Securities ETF, ticker CWB, isn’t a dividend stock but it does pay monthly and I’m glad it made the list.
The fund holds more than 300 convertible bonds which is debt borrowed by companies that can be converted into shares of stock. It’s a great hybrid investment with the safety and interest yield on the bonds but some upside potential for return.
And these are bonds of strong companies, large companies like Wells Fargo, Bank of America and Tesla.
So having the risk spread out across hundreds of companies and having that safety of bonds makes this a great addition to our dividends list.
Shares of the CWB pay a 2.2% yield but because of that convertible option, have produced an 18.5% annualized return over five years.
And our top monthly dividend stock, Gladstone Capital, ticker GLAD, with its 7.6% dividend yield.
Gladstone is another business development corporation but managed really well to produce a strong return. The effective yield on the portfolio is 10.8% which is well above the dividend yield and means the company has more left over to invest in growth and grow that share price.
The portfolio is well diversified across 18 industries with nearly half the loans as first lien status and 8.4% of the portfolio in equity ownership for that upside return.
Shares have produced an astonishing 19% annually over the last five years, that’s 138% total return over the period.
These are monthly dividend stocks that not only pay you every single month but that have produced an annual return from 12% to as high as 19% over the last half decade. Which dividend stocks are you buying?