While most dividend stocks pay out dividends on a quarterly basis, there are some that pay out dividends monthly.
The nice thing about monthly dividend payments is that they come much more frequently than quarterly dividends and therefore can make a retiree's monthly cash flow much more consistent.
Furthermore, they provide more frequent psychological boosts to investors during down markets by giving them monthly cash flow. As a result, investors may be less likely to sell at inopportune times when holding monthly dividend stocks rather that quarterly dividend stocks or even stocks that pay no dividend at all.
Below, we will discuss three monthly dividend stocks that have attractive yields.
If It Can Make It There...
SL Green Realty Corp. (SLG) is a real estate investment trust (REIT) that owns some of Manhattan's best real estate assets. In fact, it is Manhattan's largest office landlord. Its assets are generally highly desired by technology and financial services firms due to their attractive amenities and strategic centralized location in the business center of New York City.
While the stock price has been decimated recently, it continues to generate organic growth. SLG's same-store net operating income rose 3.3% year-over-year in Q4, while occupancy remained solid at 91.2%. The company is currently opportunistically selling off some of its assets and using the proceeds to deleverage the balance sheet and buy back its deeply discounted stock.
Moving forward, we believe that SLG's occupancy and rental rates will likely recover as lingering headwinds from the Covid-19 outbreak and the severe New York City lockdowns dissipate. When combined with fairly aggressive share repurchases, we think SLG can grow its FFO (funds from operations) per share at a 5% CAGR over the next half decade.
As SLG returns to FFO per share growth, its recently cut dividend should resume growth as well. Best of all, the massive price-to-NAV discount should also begin to close. When combining a significant valuation multiple expansion with mid-single-digit annualized FFO per share growth and the 8% current dividend yield, SLG appears to be a highly likely candidate for long-term double-digit total return performance.
The main risk to the investment thesis is that SLG's balance sheet is pretty heavily leveraged and cap rates are starting to come under pressure due to rising interest rates. If the cap rates continue to rise and SLG does not reduce its leverage ratio soon, it could quickly find its price-to-NAV gap disappearing and its shares may not end up being so undervalued after all.
That said, the total return potential would still likely be attractive when combining the high monthly dividend with the growth prospects.
A REIT With Immense Scale
Realty Income Corp. (O) is the leading triple net lease REIT with immense scale. It has a $59 billion enterprise value and owns 11,733 properties that are leased out to 1,147 tenants.
O's leases are very conservatively structured with the tenant assuming virtually all of the operational and capital expenditures alongside 10+ year lease terms that often enjoy bankruptcy protections and have fixed contractual rent bumps each year. O currently has an 8.8-year weighted average lease term to expiration and generates 43% of its rent from investment-grade tenants, giving it a secure and highly visible cash flow profile.
Its balance sheet is also quite strong, as evidenced by its A- credit rating. O has a 6.3-year weighted average term to maturity for its notes and bonds, a 5.5x fixed charge coverage ratio, a leverage ratio of 5.2x, and liquidity of over $2.5 billion. As a result, it has little risk of experiencing financial distress for the foreseeable future.
Last, but not least, its dividend track record and profile remain among the most consistent and predictable in the entire stock market. Thanks to its conservatively structured business model and balance sheet, O has grown its dividend for 27 consecutive years while also delivering market-crushing total returns.
Looking ahead, O's dividend remains very safe with strong cash flow coverage. Furthermore, analysts expect its dividend per share to grow at a mid-single-digit annualized rate for the foreseeable future, combining with its 4.5% dividend yield and likely valuation multiple expansion to drive potential double-digit annualized returns. When including its very low risk profile, O looks like a very compelling monthly dividend stock investment.
A Suit of Dividend Armour
Armour Residential REIT (ARR) is a mortgage REIT that invests in residential mortgage-backed securities, including U.S. government-sponsored entities like Fannie Mae and Freddie Mac. The company also invests in fixed-rate, hybrid adjustable-rate, and adjustable-rate home loans from the Government National Mortgage Administration.
The company's business model consists of issuing debt alongside preferred and common equity and then reinvesting the proceeds into the aforementioned debt instruments. It then returns the vast majority of the net spread that it earns on this process to shareholders via dividends.
As a result, whenever spreads widen, ARR generally sees its growth rate accelerate and then when interest spreads tighten, it sees its earnings decline. This has led to a very volatile earnings per share and dividend per share track record for the trust. In fact, over the long-term its dividend per share has declined significantly because interest rate spreads have generally gone in a negative direction for the trust and its high payout ratio leaves it little margin of safety.
As a result, while the current monthly dividend payout looks very attractive with a 19.4% annualized yield, investors should keep in mind that the dividend is highly subject to interest rate movement. As a result, ARR is more of a speculative investment than a long-term wealth compounder, so investors should keep that in mind when deciding whether to buy shares in it.
For retirees looking to fund their monthly living expenses, monthly dividend stocks can be a great tool. That said, just because a dividend is attractive and is paid monthly does not automatically make it a great fit for the portfolio.
With O, you will get a bit lower of a dividend yield at 4.5%, but it will be very dependable and likely grow over time.
With SLG, you get an attractive dividend yield of 8% with substantially more risk than you would with O. However, there is a decent chance that it will be sustainable for the foreseeable future from current levels and may even grow over time.
Finally, with ARR you get by far the most attractive dividend yield of the three at 19.4%. However, given the speculative and volatile nature of the business model, this dividend is anything but reliable and investors should expect it to be cut at some point in the future.