Monthly Dividend Stocks 101 and How to Invest: GET PAID NOW!
Most stocks only pay dividends every three months but that’s not how your bills work so what better way to pay your monthly budget for pop-tarts than with these special dividend stocks that are going to put cash in your pocket every single month!
Now I try to show you a little of how to invest in these each video but it occurred to me that we’ve never done a complete monthly dividend stocks tutorial, a single video to help you find and invest in the best monthly dividend payers.
You know we can’t get started though without that special shout-out to all you in the nation, thank you for spending a part of your day here.
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Looking into these, you’re going to see there’s something special about monthly dividend stocks even beyond that consistent cash flow. These monthly payers go above and beyond in their commitment to shareholder cash return.
Because they have that pledge to monthly dividends, management is laser-focused on cost management and efficiency. You see less wasteful spending and fewer vanity projects at these companies than you do at others because cash management is always top of mind.
And it pays off in that dividend return. You get companies like Prospect Capital, returning a cumulative $3.3 billion in dividends since its 2004 IPO or investor favorite Realty Income, ticker O, which has paid its dividend every month for almost 30 years and increased that dividend for the last 115 consecutive months.
I’ll show you how monthly dividend stocks are different next but I also want to personally invite you to get the Weekly Bow Tie, our free weekly newsletter with all the stock market news, strategies and trends you need to know. Each week, before the market opens, I’ll show you what I’m watching and the stocks that could highlight the week. It’s all totally free, just something I like to do for you out there in the community so look for the sign-up link below.
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The most important point to realize about monthly dividend stocks is that these are mostly in just a few types of business models. Of the 60 monthly dividend payers and funds I follow, 37 are in just three types of businesses and almost all the rest are exchange traded funds. You see here there are 17 real estate investment trusts and mREITs, 8 master limited partnerships or MLPs and 12 business development companies or BDCs. The rest here are funds holding bonds, stocks or other assets and paying monthly.
Characteristics of a Good Monthly Dividend Stock
I’ll explain each of these but they all share some common characteristics and risks that you need to know about. One is that most of the return from these stocks is going to be from dividends. These companies get a special tax break if they return at least 90% of income to investors through dividends. That means a great dividend yield but also that the company isn’t saving much back for growth in the share price. It differs from stock to stock but don’t expect monthly payers to grow your portfolio much.
These types of companies are also more sensitive to changes in interest rates and the economy than others. The business model in those DBCs and real estate investment trusts revolves around interest rates and a healthy economy so when rates rise or the economy slows, these stocks can sell off suddenly. It’s not a deal-breaker for these stocks but just something you need to be ready for every downturn in the market.
Third here, more of a characteristic than a risk, is that you need to know how to analyze these because it’s different from other stocks. For example, REITs and MLPs have so much depreciation that earnings isn’t a true measure of income. That means you can’t use valuation measures like the price-to-earnings ratio and need to use cash flow measures instead. Anyone that says they wouldn’t invest in that REIT stock because the PE ratio is so high doesn’t have a clue of what they’re talking about.
Now that I’ve sufficiently scared the bejeezus out of you with those risks, let’s look at how monthly dividend stocks work and how you get paid.
How Monthly Dividend Stocks Work
At the basic level, monthly dividend stocks work like any other. The Board of Directors declares a dividend each month and tells investors the day they have to own the shares to get the payment. That’s the day before the ex-dividend date. Because investors depend on that cash flow, most companies try to declare and pay their dividends around the same time each month.
The biggest difference in how monthly dividend stocks work is in their business types and it can have big consequences for the stock.
BDCs or business development corporations are like banks for mid-sized companies, those too big for a loan from a regional bank but too small to issue stock. So BDCs make loans and will sometimes make an investment in the company. This means they are highly cyclical, seeing more loans and investments default, when the economy turns lower.
REITs or real estate investment trusts, own property and pass the rental income on to investors. It’s a great way to get some exposure to real estate in your portfolio without having to come up with the down payment to invest directly. Since real estate is highly leveraged, REITs can take a hit when interest rates rise because it makes the cost of funding higher on property.
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The third type of business here, MLPs or master limited partnerships own oil pipelines and charge oil companies a fee to move energy through to processing facilities. They’re usually a little less exposed to changes in energy prices because part of the revenue is fee-based but you’ll still see volatility around oil prices. The biggest drawback to MLPs though is you’ll receive a special tax form each year that makes filing a little more complicated.
We’re just getting started on our monthly dividends guide but I wanted to get your opinion on this as well. Do you prefer monthly dividends or quarterly, or does it even matter much to you? Scroll down and let me know in the comments, is the fact that a stock pays monthly dividends important in your investing decision?
3 Tips for Investing in Stocks That Pay Monthly Dividends
Finding monthly dividend stocks isn’t difficult. I keep a list of the monthly dividend payers and ETFs on my blog, My Stock Market Basics, that I’ll link to in the video description. You’ll find the dividend yield, annual payout over the last year along with five-year returns. To check the dividend dates and payouts for each stock, you go to the stock’s page on Yahoo Finance. Then you click on Historical Data in the menu and can view over different time periods. Change this to show dividends only and click apply to see the ex-dividend dates and dividend payments for the stock.
Next I’ll reveal my favorite monthly dividend funds and the monthly stocks I own but first I wanted to share three tips for investing in monthly payers.
First is don’t just chase that high-yield. Investors get dollar-signs in their eyes looking at closed end funds or high yield stocks and jump in head-first. There’s a trade off between yield and stock appreciation and it’s best not to be at either extreme. So in the dividend funds and stocks I’ll share next, we’ll strike a balance between collecting that cash flow and growing your portfolio.
Related to that is make sure you check out the stock chart and dividend history of the stock. Too many high yield stocks or monthly payers have destroyed more value than they created. Now it’s common to see the price fall a little, especially on the stocks paying double-digit yields but if the drop in the price wipes out all the dividend yield then you’re no better off than when you started.
Finally here, invest in at least one or two monthly dividend funds like the ones I’ll highlight next. These are not only going to give you that monthly cash flow but will also help you spread out your risk in other types of businesses and dividend stocks beyond just the usual suspects like BDCs, MLPs and REITs.
Now I want to highlight some of my favorite monthly dividend funds and I know there’s a few of you that just skipped right to this section…you know who you are. Nothing wrong with that, I know the stock picking is the fun part but please, take the time to watch through the first part of the video because its only through understanding the risks in these as well as what to look for that you’re going to become a better investor.
The Global X Super Dividend ETF is one of my favorite dividend funds not just for its 12.8% dividend but the fact it gives you exposure to regular dividend stocks as well.
The fund holds 100 of the highest dividend paying stocks globally and produces one of the highest yields you’ll find in an ETF. The expense ratio is 0.6% which is higher than most but there’s still a lot to like about this one.
The fund is well-diversified across different industries and internationally and I especially like the exposure to stocks in other countries which is something most investors lack. And because a lot of those stocks are in cheaper international companies, the price-to-earnings ratio is just 10.3-times on average…about half the average for U.S. stocks so you get a good value play as well as dividends.
The Invesco S&P 500 High Dividend, Low Volatility ETF, ticker SPHD, is another popular dividend fund for its lower risk and 3.6% yield.
This is a great dividend stock ETF because it combines the search for those high yields with a lower risk profile in those with lower volatility. The fund invests in 50 stocks of U.S. companies with high dividend yields that have also historically been safer than others. It’s a little more concentrated in a few sectors including real estate, utilities, financials and staples but those just tend to be less volatile than the economically sensitive ones.
And I wanted to use these two monthly dividend funds as alternating options because it’s a really interesting choice for investors. You can see in the two-year chart here that while the SDIV pays a much higher dividend, the SPHD makes up for it in price return. With the SDIV dividend fund up just eight-tenths of a percent, most of your return is from that annual 13% dividend yield which is pretty damn good by itself. The SPHD Dividend Fund though has actually produced a higher total return though only a small part of that has been from the dividend.
So it’s really a question of which is more important, total return or that monthly cash flow but both of these are solid dividend funds and will give you that exposure to dividend stocks outside the usual suspects of BDCs, REITs and MLPs.
Here I also want to share two monthly dividend funds that are a little different, first the iShares Morningstar Multi-Asset Income Fund, ticker IYLD, with its 4% yield.
Instead of investing directly in stocks or bonds, this fund is a fund-of-funds. It holds 10 income funds across the asset classes. So you see here, it’s got high-yield bonds, international stocks. It invests in emerging market debt and U.S. Treasury bonds as well as real estate and preferred shares.
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The fund has a target of 60% in bonds, 20% in stocks and 20% in alternative income investments. It also holds about 45% of the portfolio in international assets, so strong diversification here by asset class as well as in different sectors. That large weighting in bonds gives it a high level of safety though it still holds enough in other assets and sectors for a good total return.
Another great monthly dividend fund in that alternatives idea is the iShares Preferred and Income Securities ETF, ticker PFF, with its 4.6% dividend.
Preferred shares are a special type of stock with rights that go beyond the normal shares. Preferred shares have a set dividend yield and a payment that must be paid before regular stockholders get any of their dividends. These investments usually offer a much higher dividend as well. For example, Bank of America issues preferred shares paying between six- to seven-percent dividends while its common stock pays a dividend yield under three-percent.
Best of all though is that preferred shares enjoy some of the growth benefits of regular stocks. Most preferred stock is convertible into regular stock if the share price reaches a certain point. Basically the company is saying, Here enjoy this high dividend yield if the stock price goes nowhere and a potentially higher return if the shares take off!
The PFF holds 512 preferred securities with an average price-to-earnings ratio of just 9.5-times, which again is about half the market average. The fund price also tends to be about half as volatile as the stock market, so definitely that idea of safety and cash flow.
It’s pretty heavily weighted to the financials sector, with about 54% in banks, diversified financials and insurance because that’s the sector that issues these types of preferred shares the most.
I love those funds for giving you exposure to other assets and dividend stocks outside the monthly payers but then wrapped up into an ETF that pays monthly. For my favorite monthly dividend stocks, I wanted to pick one from each of those three business types; BDCs, REITs and mortgage REITs.
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First is mortgage REIT, AGNC Investment, ticker AGNC, with its 12% dividend yield.
AGNC holds a $103 billion investment portfolio with $99 billion of that in Agency mortgage backed securities. It’s basically borrowing on extremely low short-term rates, leveraging that money up and then investing in longer-term mortgages. That’s how it’s able to turn a spread of 2%, the difference between its borrowing and investments, into a nine- or ten-percent return.
Book value is really the measure you want to use to value mortgage REITs and it hasn’t been pretty for AGNC, now at $16.41 per share. That means the shares are trading under their book value which is a pretty good place in terms of value.
One bright spot is that the net interest spread, that’s the difference between the interest rates on investments minus those short-term rates on which the company borrows, that spread has increased over the last year and the company is hedged on many of its products so should be able to continue that profitability ahead.
Now the mortgage market has been ugly this year as higher interest rates scare off homebuyers so this and all the mREITs have fallen hard. It’s a solid business model though and will continue to produce that dividend yield with some long-term price upside.
For our BDC, I like Gladstone Investment Corporation, ticker GAIN on its 6.4% dividend yield.
And why I like GAIN here is because it takes a higher equity share than most other BDCs. Remember, those business development corporations are mostly making loans so the upside is capped at the interest rate. But Gladstone’s target investment is 25% equity and 75% debt versus a traditional BDC that will look for less than 10% equity in the companies it works with. That higher equity ownership might mean higher risk but it’s also going to mean higher returns on these investments.
And we see that in GAIN’s history of return on equity which is well above the industry average. The five-year average ROE of 17% is over three-times the median ROE for the BDC group and even though near-term return has come down, it’s still well above the average for the group.
Gladstone’s current portfolio is spread across 28 companies in 14 industries so a level of diversification there that should help it continue those returns even in a sluggish economy. The shares have done so well in fact that it’s been able to pay out multiple special dividends, boosting that cash return.
And all you out there in the Bow Tie Nation know, another favorite real estate trust of mine is STAG Industrial, ticker STAG.
And while the 4.6% dividend yield isn’t as high as other REITs, STAG has also produced a 4.8% annualized price return on top of that over the last five years so it’s a solid combination of dividends and appreciation. It’s also one of my favorite property types. STAG owns 450 industrial and warehouse properties across 38 states for a total 91 million square feet.
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.
So with STAG, you’re not only getting a dividend yield that’s still almost three-times the market average but exposure to a part of the real estate market that should drive returns for decades.
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