Monthly dividend paying stocks have become increasingly popular over the years, and investors are constantly on the lookout for the best monthly dividend stocks good reason.
A monthly dividend can be a great way to help pay for living expenses in retirement, or simply act as a way to compound one’s wealth faster through more frequent dividend reinvestment.
That’s because the world of monthly dividend paying stocks is a minefield packed with terrible value traps just waiting to destroy your wealth.
In fact, most monthly dividend stocks score dangerously low using our Dividend Safety Scores.
In this article, you will learn about seven of the best monthly dividend stocks that potentially represent attractive long-term investments and discover three types of monthly dividend stocks to avoid.
The Best Monthly Dividend Stocks
While quality monthly paying dividend stocks are few and far between, some do exist.
Here are seven of the best monthly dividend stocks for investors to consider. Six of the stocks are REITs, and one is an internally managed BDC.
Each of the top monthly dividend stocks on this list has proven it can grow long-term shareholder value as well as offer generous income each and every month of the year.
1. Realty Income (O): Yield 4.4%
Realty Income is the gold standard of low-risk REITs and has become famous for a fantastic long-term track record of growing monthly dividends (76 straight quarterly increases).
If only one company could make the best monthly dividend stocks list, it would be Realty Income.
The underlying strength of “the monthly dividend company” is its diverse portfolio of 4,703 properties rented to 247 companies in 49 states and Puerto Rico. Each of these properties is rented out under very long-term 20- to 25-year triple net lease agreements, meaning that the tenant pays insurance, maintenance costs, and property taxes.
These low-risk lease agreements allow Realty Income to just sit back and collect a growing stream of rents with which to pay its steadily growing monthly dividend.
Of course, in the long-term what matters more than just a generous current yield is a company’s dividend safety and growth prospects. Thanks to Realty Income’s 83.5% adjusted funds from operations, or AFFO (REIT equivalent of free cash flow and what pays the dividend), payout ratio, the dividend is highly secure.
As for growth, the world-class and highly conservative management team has proven itself able to consistently grow through any kind of interest rate and economic environment. This is due to a disciplined growth strategy, both through individual bolt-on property buys, as well as big needle-moving REIT mergers.
What many investors especially like about Realty Income is that, until recently, when its share price was trading at record highs, management was funding 2016’s $1.1 billion in year-to-date acquisitions through equity sales. This has allowed the company to de-lever its balance sheet in preparation for a higher interest rate environment in which its shares would likely trade a lot lower (as they are now).
Or to put it another way, Realty Income now has the strongest balance sheet in nearly a decade and has plenty of cheap borrowing power available to continue buying high-quality properties going forward, without having to dilute existing investors.
That should help it to drive consistent long-term AFFO per share growth and allow it to deliver 4.5% to 5% dividend growth over the next decade.
Investors can read my full investment thesis on Realty Income here.
2. LTC Properties (LTC) Yield 4.8%
LTC Properties is one of the best monthly dividend stocks for long-term income investors to profit from the aging of America’s population.
That’s because LTC owns 223 medical properties, including skilled nursing facilities and assisted living facilities across 30 states. In addition, LTC is an expert in making long-term loans to medical providers to fund investments into these kinds of facilities, the demand for which is very high (meaning high occupancy rates) and should only strengthen in the coming decades.
LTC’s top notch management team has proven itself one of the industry’s best capital allocators as well, generating margins and returns on shareholder capital that are double or triple the industry average.
Better yet, with a very strong balance sheet and a small base of properties from which to grow, LTC has many more years of strong growth ahead of it. For example, year-to-date the REIT has grown revenue and AFFO per share at 20% and 10.2%, respectively.
That not only means that, with a payout ratio of 78.6%, the dividend is among the safest in its industry, but LTC Properties has potential to continue growing its monthly dividend at around 5% over the next decade.
Better yet, with a beta of just 0.2, LTC is one of the least volatile stocks in the market, which makes it a holding to consider for risk-averse investors such as retirees.
3. EPR Properties (EPR): Yield 5.4%
EPR is a REIT that specializes in triple net leases of entertainment and education properties. As of Q3 2016 it owns: 298 movie theaters, charter, and private schools, water parks, ski parks, golf courses, and a casino. Its 19.6 million square feet of leasable space has an impressive 99.5% occupancy under long-term leases.
The REIT has been growing like a weed, thanks to its small property base but aggressive acquisition strategy, including $675 million of acquisitions this year. That has fueled strong growth that allowed management to just raise the dividend 5.8%, marking the sixth consecutive year of payout increases.
More importantly, with an AFFO/share payout ratio of 81%, the dividend is highly secure and likely to continue growing around 5% to 6% a year for the foreseeable future. That’s thanks to the just-announced acquisitions of 34 additional water, ski, and amusement parks for $700 million.
This 11.4% increase in properties represents just a small piece of management’s growth plans. In 2017, EPR expects to invest $1.35 billion into further asset expansion, which makes this one of the fastest-growing monthly dividend payers you can find.
4. Stag Industrial (STAG): Yield 5.9%
STAG Industrial is an industrial REIT specializing in secondary market warehouses. The growth catalyst for this top monthly dividend stock is the highly fragmented and vast size of the warehouse market ($250 billion), and the fact that STAG currently has just a 1% market share. In other words, the company appears to have a very long growth runway.
Better yet, the warehouse market is likely to grow in coming years thanks to the rise of e-commerce and the insatiable demand for more fulfillment centers being created from the continued rise of online retail giants such as Amazon (AMZN).
With its top execs having nearly a quarter century of industry experience each, STAG is well situated to achieve strong but disciplined growth. For example, management has chosen to keep the REIT’s dividend growth modest in recent years, in order to allow its fast-growing cash flow to catch up to the dividend (small industrial REIT’s like STAG usually IPO with payout ratios of 90% to 95% to attract investors with high current yields).
With a payout ratio of 84.8%, STAG’s generous monthly dividend looks secure. STAG Industrial’s $1.9 billion growth pipeline, which would increase its total property county by 57%, from 300 to 470, should help the company generate long-term payout growth of 5% to 6% in the coming years as well.
5. Chatham Lodging Trust (CLDT): Yield 6.1%
Chatham is a hotel REIT specializing in luxury brands such as Marriott, as well as high-end extended stay properties. It currently own 133 hotels, either outright or as part of joint ventures with other investors.
Unlike industrial REITs, the hotel subsector has been experiencing some headwinds recently due to oversupply. That being said, Chatham Lodging management has been extremely conservative in its approach to debt and dividends, which is a very good thing in the long term.
For example, unlike some other hotel REITs that attempt to reach for growth in this era of low interest rates and wind up with an overly leveraged balance sheet, Chatham management takes a very disciplined approach to growth.
Specifically, during times when there aren’t sufficiently attractive opportunities for cheap acquisitions, it chooses to use the majority of its AFFO to pay down debt in order to have more flexibility in acquiring properties when prices fall sufficiently low.
That’s thanks to a year-to-date AFFO payout ratio of just 52%, among the lowest across all REITs. That not just makes the current dividend secure (despite the cyclicality of the industry), but also leaves plenty of opportunity for management to keep raising the dividend over the next few years (by a penny a month annually, or close to 10%). For these reasons, Chatham Lodging Trust is one of the best monthly dividend stocks.
6. Apple Hospitality (APLE): Yield 6.1%
Apple Hospitality is another luxury hotel REIT, owning 30,299 guestrooms in 236 hotels in 33 states under the Hilton and Marriott brands.
Thanks to the closing of a merger with Apple Ten REIT for $1.26 billion, the company is experiencing strong AFFO per share growth, up 13.7% year-to-date. However, while much of that growth is due to the addition of 56 hotels, revenue per available room, or RevPar, is also seeing strong growth this year, up 4.8% (far better than the industry average).
That’s thanks to a strong commitment to reinvesting in its properties, which are on average only four years old and constantly getting upgrades. This helps to keep Apple’s hotels competitive and their occupancy rates high. It also allows Apple Hospitality to boast adjusted EBITDA margins of 39%, second highest in the industry, behind only Chatham Lodging Trust.
As for the dividend, with a year-to-date payout ratio of 63.8%, Apple’s generous payout is rock solid. Better yet, it still leaves sufficient retained cash flow for management to pay down the debt that comes with large acquisitions. Even after the recent merger, Apple’s leverage ratio, (Debt/EBITDA) remains around 3, compared to an average of 4.5 for its peers.
This should allow Apple Hospitality plenty of flexibility in the future when it comes to further acquisitions, as well as growth to its dividend.
7. Main Street Capital (MAIN): Yield 7.7%
Main Street Capital is one of the few BDCs I would ever consider owning, thanks to numerous factors that make it the gold standard of the industry.
For one thing, Main Street is one of the few internally managed BDCs you can buy. Not only does this align shareholders interest with that of management but it also helps to keep the company’s overall operating costs very low (1.4% compared to commercial banks at 2.6%, and externally managed BDCs at 3.2%).
This also helps lower Main Street’s cost of capital, allowing management to be more disciplined with its underwriting (avoiding overly risky loans).
That’s very important because Main Street’s claim to fame (and why it is perennially trading at the highest premium to book value of any BDC) is that it is essentially a private equity firm.
In other words, Main Street does not just make its money by raising debt and equity capital from investors and lending it to small, middle market companies (too small to get loans from big banks), but Main Street’s management is the best in the business when it comes to also taking equity stakes in the companies it funds.
These equity stakes result in a fast-growing stream of dividends and capital gains that help to not just secure the dividend (industry-leading 89.5% payout ratio in Q3 2016), but also let it grow at the fastest rate of almost any BDC.
On top of that, Main Street also pays a biannual special dividend (totaling 55 cents per share) that’s funded by the capital gains on its equity stakes, which brings its effective yield to 7.7%.
While that may be lower than the average BDC, keep in mind that this is an industry in which low barriers to entry mean lots of competition. That results in a lot of money chasing high-yields that often result in loan losses, payout ratios over 100%, declining NAV/share, and falling dividends over time.
In contrast, Main Street has an unbeatable track record of growing its NAV per share, as well as its dividend thanks to management’s disciplined approach to lending and investing in middle market companies.
In other words, Main Street Capital’s unparalleled quality of management makes it one of the most dependable BDCs in the market, and one of the best monthly dividend stocks in America.
Monthly Dividend Stocks to Avoid: BDCs, Oil Trusts, and mREITs
Nearly all monthly dividend stocks can be grouped into a few categories including: Oil trusts, Closed End Funds (CEFs), Real Estate Investment Trusts (REITs), Mortgage REITs (mREITs), and Business Development Companies (BDCs).
All of these equity classes, except for REITs, are highly complex financial vehicles and extremely challenging to invest in successfully.
Here are three great examples of the types of companies that monthly dividend stock investors need to watch out for.
1. San Juan Basin Royalty Trust (SJT): Yield 8.9%
Oil trusts such as San Juan Basin Royalty are perhaps the worst way for investors to participate in the American shale oil & gas revolution.
That’s because, unlike oil companies or Master Limited Partnerships(MLPs), royalty trusts are set up to own one specific group of assets and can’t grow through acquisitions. In addition, most royalty trusts have a pre-set liquidation data at which point the trust will cease to exist.
While San Juan Basin Royalty Trust has no set liquidation date (it will be terminated when royalty income falls below $1 million annually for two consecutive years), the fact is that this extremely volatile and oil sensitive stock has a limited shelf life.
Worse yet, as the oil owned by the trust gets extracted (at today’s low oil prices), its production will decline. As a result, the company’s monthly distribution will also drop. Note that the distribution is taxed as unqualified dividends as well (i.e. your top marginal tax rate).
That will naturally result in a falling unit price, and given the fact that the trust isn’t allowed to acquire new properties to replenish its reserves, San Juan Basin, like all oil trusts, is nothing more than a hyper volatile variable yield preferred stock.
In other words, due to the impossibility of forecasting future oil prices, and thus the future dividend cash flow, it is very hard for investors to actually make a profit owning this stock, since the unit price will naturally decline over time.
The bottom line is that oil trusts, while they may appear to offer mouth-watering yields and, sometimes, monthly dividends, are something almost all dividend investors should avoid.
2. American Capital Agency (AGNC): Yield 11.7%
American Capital Agency is the largest pure play residential mortgage REIT, meaning its loan book is exclusively agency-backed (government ensured), mortgage-backed securities.
In other words, American Capital’s business model is to raise debt and equity and then invest it in mortgage-backed securities, or MBS, that are guaranteed against default by Fannie Mae (FNMA) and Freddie Mac (FMCC).
Because of the low risk involved in these securities, the company takes on a lot of leverage (7.7x as of Q3 2016) and uses the cash flow from the monthly mortgage payments to generate the earnings it needs to cover the dividend.
Now, in fairness to American Capital as far as pure residential mortgage REITs go, it is a “best in breed” thanks to one of the best management teams in the industry.
Specifically, American Capital Agency takes a very conservative approach to the dividend, having recently cut the monthly payout by 10% despite a payout ratio under 100% due to better than expected earnings results.
In addition, the mREIT recently completed the internalization of its management, which means lower operating costs in the future.
In fact, in the most recent quarter the payout ratio was one of the lowest in its industry at 84%. But investors need to ask, “If results are coming in stronger than expected and the earnings cover the dividend, why cut it at all?”
The answer lies with the fact that as interest rates rise, the value of the company’s loans will decline, decreasing its net asset value/share.
In fact, the interest rate sensitivity for American Capital is such that each 1% increase in interest rates will cause its net asset value (which generally drives the share price) to fall by 7.7%.
Because mREITs need to pay out 90% of earnings as unqualified dividends in order to retain their preferential tax status, American Capital needs to periodically sell new shares to grow.
However, if rising interest rates result in the net asset or book value per share to decline, then low share prices will mean that dilution of existing shareholders will make accretive earnings per share growth despite higher share count far more challenging, if not impossible.
In other words, management’s decision to cut the dividend when it didn’t need to is a sign that American Capital is attempting to fortify its payout against what management likely expects to be some very serious growth headwinds ahead.
While the current monthly dividend looks secure, that could easily change in the years to come, potentially resulting in additional dividend cuts that only further put downward pressure on the share price.
3. Prospect Capital (PSEC): Yield 12.3%
Prospect Capital is the epitome of a terrible BDC for numerous reasons. First, the company externally managed, meaning that management doesn’t work for shareholders.
Rather the BDC pays Prospect Capital Management some of the highest fees in the industry (2% of assets, plus 20% of the growth of assets above a low hurdle rate of 7%) to run the business for investors.
For example, management’s base fee is paid not on net assets, but total assets.
In other words, as long as Prospect is growing its loan book, management pay rises.
However, raising the capital to do that can be accomplished by piling on debt and, worst of all, diluting shareholders by selling shares at a discount to book value, which the BDC does in spades.
In other words, with Prospect trading at 86% of book value, every share sold represents management selling $1 of current investors’ assets for $0.86.
This automatically destroys long-term shareholder value, but the money raised from this dilutionary move allows management to increase its assets and thus its pay.
So basically, because management’s pay isn’t based on net assets per share, but just the absolute value of them, Prospect’s management can make out like bandits even if the value of the company, and its dividends, decline over time.
For example, Prospects CEO John Berry III, has been taking home over $100 million a year for the past few years, as part of management’s pay of $247.2 million in 2015. That accounted for 31% of the BDC’s revenues, and is a big reason why Prospect Capital had to cut its dividend by almost 20%.
In other words, Prospect Capital represents the classic BDC that is run for the benefit of management at the expense of shareholders.
Closing Thoughts on the Best Monthly Dividend Stocks
No income investor should ever purchase a stock based primarily on its dividend payout schedule.
Despite the hundreds of monthly dividend paying stocks in the market that offer convenient dividend payments, a very small fraction of them meet the business simplicity and safety standards I demand for our Conservative Retirees dividend portfolio.
The best monthly dividend stocks run time-tested business operations, maintain reasonable financial leverage, and have management teams that are committed to shareholders before themselves.
Regardless of whether a stock pays dividends monthly, quarterly, or annually, conservative income investors should stick to effective investing habits and refuse to compromise on quality.
Simply Safe Dividends
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