You will probably agree that getting monthly dividends is preferable to receiving quarterly dividends. For those living off their dividends, monthly payments make more sense. After all, your living expenses don't happen quarterly; most bills come in monthly.
Wouldn't it be great to invest in some of the best monthly dividend stocks that also have high yields? That way you could have the best of both worlds: high dividend income that comes in monthly instead of quarterly.
Today we'll look at four high-yield monthly dividend stocks for monthly income. Three of them are real estate investment trusts. REITs are required by law to pay out at least 90% of their income to shareholders. One of the REITs we'll examine has a long dividend history, long enough to be one of only 274 Dividend Achievers, stocks with or more years of consecutive dividend increases.
The other monthly dividend stock in this article is a business development company. BDCs invest in smaller private companies through debt and equity deals. Investing in BDCs is a way to add diversification to your portfolio by investing in "Main Street, not Wall Street."
There is good reason why income investors should be interested in stocks that pay dividends monthly. Monthly payouts allow investors to compound their wealth even faster than they would with traditional quarterly or semiannual distributions.
Main Street is a BDC. It offers debt and equity financing to private companies in the middle market, which have annual revenue typically between $10 million and $150 million. Main Street makes money by maximizing the income and capital appreciation it receives from its debt and equity investments. As of the first quarter, Main Street had nearly 200 portfolio investments in unique companies, and $3 billion in capital under management.
The company has done an excellent job of paying dividends. Since its 2007 initial public offering, Main Street has distributed more than $17 per share in dividends.
Last quarter, the company increased its distributable investment income and net investment income by 16% each. The increase in investment income was driven by gains in interest income due to higher debt investments, as well as rising dividend income due to higher equity investments.
The company ended the quarter with a net asset value of $21.18 per share, which means the stock currently trades for approximately 1.5 times its net asset value. Since 2007, Main Street has increased its net asset value by 65%.
Main Street has an annual dividend yield in excess of more than 6.7%, which is about three times the yield offered by the market. The S&P 500 index yields roughly 2% on average, which means Main Street is attractive for investors seeking income.
Plus, there is a dividend increase on the way. Main Street announced 54 cents per share in second-quarter dividends, or 18 cents per month. This would be a 3% increase vs. the comparable three-month period last year.
Main Street is in good financial condition. The company ended last quarter with a net debt-to-equity ratio of 72%, along with a triple-B credit rating from Standard & Poor's.
Chatham Lodging Trust is a REIT that invests in upscale, extended-stay or select-service hotels. It owns 133 hotels either directly or through joint ventures.
REITs are very popular with income investors. That's because REITs are required to distribute at least 90% of their cash flow to investors as a dividend. This typically results in above-average dividend yields in the REITs when compared to the S&P 500.
Chatham offers investors a good mix of high dividend yield plus regular dividend growth. This year, the company raised its dividend by 10%. It has increased its dividend each year since its initial public offering in 2010. In that time the annualized dividend has grown from 35 cents per share to its current level of $1.32 per share. Its annualized dividend of $1.32 per share provides a 6.3% dividend yield based on its current share price.
Importantly, Chatham's dividend looks sustainable. Even after the dividend increase, the 2016 annual payout represents just 54% of the company's projected funds from operation, or FFO. Instead of using traditional earnings per share to analyze REITs, most investors find FFO to be the best metric. That is because for REITs, traditional EPS usually includes significant financial costs like depreciation and amortization, as well as one-time gains on sales of property. These items are added back to calculate FFO. FFO is a better measure of a REIT's profitability, because it focuses on the core, recurring cash generation of the underlying business.
Using FFO as a guide, it is clear that Chatham is very successful at achieving sustainable growth. Last year, the company grew FFO per share by 20%. It followed this up with 18% growth in the first quarter. Portfolio occupancy stood at 78% last quarter, and Chatham's hotel revenue per available room increased 2% year over year. This year, the company expects to grow FFO by another 5.9%, based on the midpoint of its guidance range.
Chatham has a strong portfolio and high profitability, which makes it an attractive high-yield monthly dividend stock.
Realty Income is so dedicated to monthly dividend payments that it calls itself "The Monthly Dividend Company." The company is a Dividend Achiever thanks to its dedication to dividends.
Realty Income is a REIT. It engages in "net" leases, meaning the tenant is responsible not just for paying rent every month, but also for covering the major operating expenses such as taxes, maintenance and insurance.
It has a highly diversified portfolio: Realty Income has more than 4,600 properties in its portfolio, spread across more than 240 commercial tenants in 47 different industries. These properties are primarily rented to retail tenants that come from various industries such as distribution centers, health and fitness facilities, and drugstores.
Last year, Realty Income grew revenue by 9.6% to $1.02 billion. Realty Income reported that FFO per share in 2015 increased 7.4% to $2.77, vs. $2.58 in 2014.
Realty Income maintains excellent portfolio metrics. Last quarter, portfolio occupancy was 98%. The company has a weighted average remaining lease term of approximately 10 years. And it enjoys pricing power. The same-store rents on 4,112 properties under lease increased 1.3% last quarter.
Realty Income has made 550 consecutive monthly dividend payments, and has raised its monthly dividend 85 times since its initial public offering in 2004. Going forward, investors should keep an eye on interest rates, which could cause REITs like Realty Income to see contracting earnings. But Realty Income is still in good shape because the company can access capital easily in both the equity and debt markets. For example, in January the company sold 11 million shares, the proceeds of which were used to pay down debt.
The company repaid $150 million of bonds and approximately $200 million of mortgages last year. Interest expense decreased last quarter by $7.1 million, to $52 million. In the future, Realty Income's interest expense should remain manageable. Management expects another 1.8% to 4.3% growth in FFO in 2016, which should provide more than enough growth to continue increasing the dividend. The current dividend yield is 4.1%.
EPR Properties, like Realty Income and Chatham Lodging, is a REIT. The business model for REITs is to raise capital, invest in properties, and then collect rents from tenants. The cash flow generated from rents allows them to invest in additional properties. This creates something of a "snowball effect" that produces steadily rising cash flow from year to year, and helps keep dividends rising at a steady pace. This is why REITs are favored by income investors, and EPR Properties is no exception.
EPR Properties' annualized dividend of $3.84 per share comes out to a 5.6% dividend yield based on its current stock price. Since 2010, EPR Properties has increased its dividend at a 7% compound annual rate.
During a period of extended low-interest rate policy by the Federal Reserve, yield is hard to come by from fixed-income securities. As a result, investors looking for yield have flocked to the REIT asset class.
EPR Properties has a strong portfolio. It has more than 250 tenants spread across more than 270 locations. Its portfolio has approximately $4.7 billion in total investments. Its portfolio is concentrated in three core industries: entertainment, which includes movie theaters and entertainment retail centers; recreation, which includes ski parks, water parks and golf entertainment complexes; and education, which includes public charter schools and early childhood centers.
This strategy has clearly worked. Last year, EPR Properties grew revenue and adjusted FFO by 9% and 8%, respectively. Revenue reached a company record in 2015, driven by 15% growth in rental revenue. The company expects 7% growth in adjusted FFO this year.
EPR Properties is more of a niche player in the REIT asset class, but it has a very solid tenant base and a proven track record of growth.