Look to these safe monthly dividend stocks ahead of a recession
Looking at a chart of monthly dividend stocks immediately shows a huge problem for cash flow investors. Many of these stocks lose just as much or more on their share price as they pay out in dividends. It's important to find safe monthly dividend stocks to invest in.
It’s a big problem for monthly dividend investors, balancing that constant payout with the stock price so you don’t see your entire cash return wiped out.
In this video, I’m highlighting the top monthly dividend stocks that will never let you down. I’ve picked through the list of 45 monthly payers to find a portfolio that will produce consistent cash flow and solid returns.
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Monthly Dividend Stocks can be Dangerous
One of my favorite topics here on the channel is monthly dividend stocks. Who doesn’t like getting paid every month to hold an investment?
But there are a couple of huge problems with monthly payers that will ruin your portfolio if you don’t know the risks. First is that the cash payout on these tend to be so high that financing for the company is a constant threat. Most of these companies pay out 90% or more of their income so they’re dependent on credit markets and internal cash flow to operate.
That means stock prices for these companies can make even the scariest roller-coaster look like the tea-cup ride at Disney.
Case in point, Look at oil & gas explorer Enerplus Corporation with its shares down 51% in the last year alone and the dividend has been cut from $0.09 a share in 2014 to just a penny per share each month. Even paid out twelve times a year, that’s still only a 2% yield and investors have been completely destroyed by the price loss.
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Investing in Dividend Stocks for Monthly Returns
Monthly Returns refers to the dividend payments. For example, if you invest $100 in stock X on Jan 1st 2021 and it pays $1 per year on July 1st until you sell or reinvest that money into another stock, then your monthly return is $1/$100 * 12 = 0.0833%(yr)
Do not confuse Monthly Returns with Annual Returns. The former is used when talking about dividends while the latter is used for total returns including capital gains.
The US has many great characteristics but perhaps its greatest asset is its citizens who are some of the most innovative people in the world today. This innovation leads to high quality products and services which drives economic growth through increased consumer spending and corporate profits.
The US also has retained its position as the global leader in financial services, which means that it has an extensive stock market with full regulation. This makes the US a prime location for investment, particularly dividends because there are thousands of publicly traded companies to choose from.
Different types of stocks provide different total returns over time. While taking on more risk can lead to larger gains it also typically leads to greater losses during the inevitable downturns. One way investors mitigate this risk is by investing in dividend paying stocks rather than non-dividend paying stocks.
There's an old saying that states “you can't go wrong with high yield” because companies have two primary goals: increase shareholder value and maximize profits. Dividends are one way companies accomplish this while minimizing risk.
Investing in dividend stocks for monthly returns is a sound strategy to adopt if you want to achieve consistent, sound passive income. There are many attributes that make stocks ideal for achieving consistent, sustainable passive income over time.
First, investing in dividend paying stocks requires little effort on your part aside from setting up automated recurring contributions into the stock market via an online broker or other means. Not only does this require no effort but it also allows you to avoid the emotional roller coaster of trying to pick winning investments which inevitably leads to poor decision making and losses due to high investment turnover.
Secondly, investing in dividend paying stocks allow you to maintain flexibility because dividends can be reinvested or withdrawn at any time without additional costs or penalties. This is in stark contrast to mutual funds, index funds or other types of investments that typically charge fees for early withdrawals.
Finally, investing in dividend paying stocks provides you with stability because dividends can be counted on to provide a flow of passive income each month.
How to Find Safe Monthly Dividend Stocks
I’ll reveal a couple of those other risks to monthly payers later but I’ve found five companies you can count on for that monthly check. I sorted through the list of 45 monthly dividend stocks for the five best on consistent cash flow and growth, consistent dividends and relative price safety versus peers.
I’ve also got a bonus monthly dividend fund I’ll reveal at the end of the video.
Our first monthly dividend pick is LTC Properties, ticker LTC, a real estate investment trust specializing in senior housing and healthcare properties. Now this one has the lowest dividend yield of the five I’ll talk about at just 4.7% but it’s hard to beat healthcare for stability and safety in cash flow.
The company diversifies its investments in direct property ownership, mortgages and structured finance and the properties it owns are mostly sale-leaseback so it buys the property from another company and rents it back to them for extremely stable occupancy. LTC owns 198 skilled nursing and assisted living properties across the U.S. with three more in development and three land deeds for developing.
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Here’s a bonus right now for monthly payers, most of these focus almost exclusively in U.S. and North American assets. They own commercial property or oil & gas assets in the U.S. That means you won’t see all the trade war uncertainty or global economic problems you get with other stocks.
Our next pick is Main Street Capital, ticker MAIN, a business development corporation with $4.4 billion in capital under management and invested in the underserved lower-middle market for business funding.
I like Main Street because it’s a little more hands-on compared to other BDCs. A lot of BDCs basically just act as banks for small or medium-sized businesses, so providing different types of loans. On that business model, there’s really not much upside other than the loan rate and the spread the company can create through leveraging.
Main Street though is a little more like a private equity partner with the businesses it funds. It goes in with a management team to advise and help the company grow so not only does it collect that rate spread on its loans, it also creates upside exposure on an ownership stake in the companies.
The company also has investments and loans in more than 26 different industries so incredibly diversified and that’s a huge plus for BDCs. One of the problems with BDCs is often that they’re so concentrated in one sector or industry that a tough economy just wipes them out. Main Street survived through the 2008 recession and management knows how to survive any economy.
Another important point to watch for when you’re investing in BDCs is management structure. Some BDCs outsource their management to an external team, which besides usually costing more it also doesn’t necessarily align management compensation with growth in the share price. Main Street uses internal management though so it’s going to be aligned with that success for the company and shareholders.
The monthly dividend has never been decreased since its IPO and the shares pay a 5.7% yield with total yield around 7.1% when you include the special supplemental dividends the company pays.
Now one last point when you’re looking at these business development corporations for those high dividend yields. Look at the dividend yield paid on the stock and the effective yield on the company’s loans.
For example, Main Street collects a weighted average rate of 9.4% on its portfolio loans, which is way above the stock’s dividend yield. It means a lot for dividend safety and growth but you don’t get it with a lot of BDCs, so make sure the dividend yield is below the effective yield on their loans, and you can find that in the company’s financial statements.
One thing you need to watch for in your dividend portfolio is that these monthly payers tend to be in just three sectors; real estate, energy and business financing. It comes from one of the other risks I’ll talk about in a bit but basically if you’re just filling your portfolio with these monthly payers, you’re going to be very much exposed to these three sectors.
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All three are hugely dependent on cheap credit and interest rates and there are sector specific risks that can hit each. You’ll notice in the list, I’ve tried getting exposure to different parts of the sectors, so direct real estate and mortgage, companies in different parts of the energy supply chain.
The point is that any time you’re adding stocks to your portfolio, make sure you’re diversifying with companies in different parts of the economy and different sectors.
Our next pick is a small cap company, Sabine Royalty Trust, ticker SBR, with a 7.6% dividend yield.
Now Sabine is a little different from most of the energy companies you’ll see in a list of monthly dividend stocks and that’s why I like it. The trust is set up with oil & gas assets in six states across the southern U.S. So where as most monthly payers are pipeline MLPs, making their money on fees to transport or storage the commodities, Sabine makes its money on that exploration and production side of the industry.
I like to add Sabine to a portfolio of MLPs because it gives you that diversification between upstream exploration and midstream transportation.
The trust has been around since 1982 and has a solid track record for dividends. One thing I’m not so wild about though is they pay distributions on the cash flow produced in each month instead of paying a consistent dividend.
Basically, management at most monthly payers will sit down and map out their cash flow at least a few years in advance. Then they’ll set the monthly dividend at an amount they can consistently pay without eating into growth and increase the payment when they can.
Instead Sabine just pays it all out. Total distributions through August were $2.09 per share but have been as low as $0.15 per share and as high as $0.36 per share.
Against this dividend volatility in Sabine though, I’m going to give you that bonus monthly payer at the end of the video to help smooth out your payments. That bonus pick offers the most safety and stability among any of these dividend names so I think it’s really going to be a good addition to your portfolio.
Gladstone Investment Corporation, ticker GAIN, is our next pick. A BDC with a 7.1% dividend yield and another unique business model in that business development space.
Gladstone specializes in controlled buyouts of companies, partnering with management in that lower- and middle-market section of businesses in the U.S. The company focuses on cash-flow positive businesses with strong management, then helps them buy out the debt and equity owners to take the company private.
The current portfolio includes 29 companies in 14 industries and $631 million in total assets. And in these companies, Gladstone takes an equity and a debt position, so it owns a piece of the company and it’s a lender.
That equity position gives it more upside potential versus the debt-focused BDCs. Gladstone’s three-year return on equity is 16% versus an industry average of just 6% ROE, while the debt component of its business gives it a little more stability for cash flows.
Gladstone has made 168 consecutive monthly distributions since 2005 along with its supplemental distributions so a solid payer here and a great yield.
Another risk in these monthly payers, and you might have picked up on this already, is that most are from special business structures like real estate investment trusts, REITs, master limited partnerships, MLPs, and business development companies, BDCs.
These types of businesses get special tax breaks if they pay out most of their income as dividends. That means huge dividends but also a lot of uncertainty and some of the problems we’ve talked about.
One of those problems is the net income or earnings measure you hear about with other stocks, it’s totally meaningless with REITs and MLPs. These real estate and energy companies hold physical assets like property and pipelines that they can take a special depreciation charge each year against income. Now that helps lower the companies’ taxable income but they’re not actually paying out that depreciation in cash. It’s an accounting trick and it makes reported income completely worthless as a measure of the company’s financial health.
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Instead of using earnings measures like the price-to-earnings ratio or the payout ratio with these stocks, you have to use special measures of cash flow called funds from operations, FFO, and distributable cash flow or DCF.
Our next monthly dividend stock is AGNC Investment, ticker AGNC, a mortgage REIT with a 12.7% dividend yield.
As a mortgage REIT, AGNC invests in packages of home loans instead of owning the physical property. Mortgage REITs borrow on short-term funding then make those investments in long-term loans to benefit from the spread in rates. Most of the company’s assets, 87% are in 30-year loans while another 10% are in 15-year mortgages.
This one almost didn’t make the list because its stock price has been really volatile lately but one thing I really love about the company is that most of its loans are backed by Fannie Mae or Freddie Mac. So while the interest rate environment has really hit the shares, default risk on loans isn’t much of an issue.
Now the shares have tanked 18% since April so I want to address that and the outlook going forward. Anytime you get a huge drop in interest rates, mortgage REITs get slammed on pre-payments. Basically all the people refinancing and pre-paying their mortgages, the mortgage REITs get that investment back sooner than expected and now have to reinvest the money at lower rates.
The inverted yield curve, where short-term rates are higher than long-term yields, hasn’t helped either because that eats away at the funding spread for mortgage REITs. The net interest spread for AGNC, that’s the difference between what it pays on funding to the rate collected on investments, is down to just 1% from 1.55% in 2017.
That’s not a great environment for mortgage REITs but I think it’s a good opportunity to pick up shares at a discount now. Rates may be low and heading a little lower for a while but they will rebound and that’s going to mean upside return on top of the huge dividend yield for this monthly payer.
Bonus Monthly Dividend Fund for Safety
That’s five of the top monthly dividend stocks and offer a combined dividend yield of 7.6% paid every single month but I wanted to offer one more pick. Instead of another stock pick, I wanted to pick something that would not only give you those monthly dividends but the opportunity to take some risk out of your portfolio and diversify it a little.
The Vanguard Total Bond Market Fund, ticker BND, holds over 8,000 bonds and pays a 2.8% dividend yield.
So the yield on this one is quite a bit lower than the stocks on the list but this is the ultimate in safety and consistency. Almost two-thirds of the portfolio is in U.S. government bonds and the rest is all investment-grade corporate, so defaults are almost non-existent.
This is an intermediate-term bond fund, so bonds with a maturity around eight years instead of longer- or shorter-term bonds. That means the price won’t be hit as hard when interest rates do increase and the fund has produced a 4.2% annualized return since 2007.
I'm linking at the end of the video to another on valuing these monthly dividend stocks. I’ll explain why the price-to-earnings ratio is completely meaningless and two measures you can use to find the best value in monthly dividend stocks. Don’t forget to join the Let’s Talk Money community by tapping that subscribe button and clicking the bell notification.
Read the Entire Dividend Investing Series