For those of us who actually live off of our investment income, monthly dividend paying ((mopay)) stocks and master limited partnerships provide a steady stream of income that makes paying those monthly bills a little bit easier. The other benefit of mopay stocks comes about if you are reinvesting the dividends in new shares. Compounding monthly versus quarterly grows your investment just a little bit faster.
Mopay stocks and MLPs are not all that common and are dominated by business development companies, real estate investment trusts, and a few MLPs. Between the U.S. and Canada, there are over 100 mopay common stocks and MLPs excluding preferred shares, royalty trusts, mutual funds, and ETFs. This article presents my five top choices for mopay stocks.
Quality Versus Quantity
When selecting a dividend paying stock for investment, it is important to look at the dividend yield through a qualitative (versus strictly quantitative) lens looking at the underlying risk adjusted performance to ensure the overall metrics such as the balance sheet, diversification, earnings growth, and payout ratios support continued growth of earnings and dividends.
The five stocks that are covered in this article all have solid balance sheets, are growing earnings, have a diversified client base, and reasonable payout ratios. Two of the five carry investment grade credit ratings and, while the other three are unrated, all three have conservative credit worthy balance sheets. It is always risky to over reach for yield, and it is particularly risky to do so today with yields and historic lows and valuations at historic highs.
Five Mopay Stocks For The Long Term
The five stocks listed here are all real estate investment trusts ((REITs)) and cover a wide, if not complete, spectrum of real estate including lodging, health care properties, general retail space, industrial warehouse/distribution properties, and specialty retail properties. The short summaries below are provided in alphabetical order.
Chatham Lodging Trust (NYSE: CLDT) operates as a real estate investment trust organized to invest in upscale extended-stay hotels. It includes investing in premium-branded select-service hotels such as Courtyard by Marriott, Hampton Inn and Hampton Inn and Suites. The company was founded on October 26, 2009 and is headquartered in West Palm Beach, FL.
CLDT is a mid cap sized REIT that is growing quickly. It offers a 6.8% dividend yield with a very comfortable FFO payout ratio of 57%. The analysts that cover CLDT have rated the company as a Hold (4 analysts) with one analyst rating CLDT as a Buy. CLDT's funds from operations (FFO) three year compound annual growth rate (CAGR) is a very healthy 9.7%. CLDT does not have a credit rating though the company does maintain a solid, credit worthy balance sheet.
LTC Properties Inc. (NYSE: LTC) operates as an internally managed REIT that invests primarily in the long-term care sector of the health care industry through the origination of first mortgage loans and acquisition of properties that are leased to long-term care providers. Its primary senior housing and long term healthcare property types include Skilled Nursing, Assisted Living Properties and Independent Living Properties. LTC Properties was founded by Andre C. Dimitriadis on May 12, 1992 and is headquartered in Westlake Village, CA.
LTC is a mid cap REIT with a long history of conservative growth. Though it does not have a credit rating from any of the rating agencies due to its small size, LTC has a solid balance sheet. It currently pays a 4.15% dividend with a reasonable dividend payout ratio of 71% of FFO. LTC's FFO growth over the last three years has been a solid 9.5% and has a long term tail wind from aging and retiring baby boomers. Analyst's ratings are generally favorable with three rating LTC a Buy, seven rating it a Hold, and one analyst rating LTC as a Sell.
Realty Income (NYSE: O) is a REIT with the primary business objective of generating dependable monthly cash dividends from a consistent and predictable level of cash flow from operations. Realty Income was founded by William E. Clark, Jr. and Evelyn Joan Clark in 1969 and is headquartered in San Diego, CA.
Realty Income is one of the oldest REITs and one of the most successful; so successful that it has almost a cult following. Like all the stocks highlighted in this article, Realty Income is a monthly dividend stock. In addition, it is known for raising that dividend every quarter and it is a member of Sure Dividend's Dividend Achievers list. Realty Income currently pays a 3.55% dividend with an 85% coverage ratio. The company has grown FFO consistently, the last three years at a clip of 5.5% per year. The company has a solid balance sheet and carries a BBB+ credit rating, one of the highest credit ratings in the REIT sector. The analysts covering Realty Income are a little less favorable today than in the recent past. Five analysts rate it a Buy, twelve rate it a Hold, and four rate it as a Sell. The analysts ratings reflect the lofty valuation that Realty Income has reached of late.
STAG Industrial (NYSE: STAG) is a REIT which focuses on the acquisition and operation of single-tenant, industrial properties throughout the United States. The company endeavors to identify relative value investments across all locations, industries and tenants among these properties through the application of a company proprietary risk assessment model, operate those properties in a profitable manner, and capitalize business appropriately given the characteristics of assets. The company was founded on July 21, 2010 and is headquartered in Boston, MA.
STAG pays a dividend of 5.66% with a FFO payout ratio of 90%. STAG has grown its FFO over the last three years at an annual rate of 3.4%. Significantly, STAG maintains a BBB investment grade credit rating which provides them access to capital markets at favorable rates. STAG is covered by 14 analysts with generally favorable ratings on the stock. Three analysts rated the company as a Buy, two rate it as Outperform, seven rate it as a Hold, with one analyst each rating STAG as Underweight and as a Sell. STAG has had a strong run of late and is up over 33% year to date.
Whitestone REIT (NYSE: WSR) is a fully integrated real estate investment trust that owns, operates and redevelops community centered properties. The company focuses on value creation in its community centers, concentrating on local service-oriented tenants. Its diversified tenant base provides service offerings including medical, education, casual dining, and convenience services. The company was founded on August 20, 1998 as a non-publicly traded REIT headquartered in Houston, TX. WSR went public on August 25, 2010 and is approaching 6 years of successful operation as a publicly traded REIT.
WSR provided a current dividend yield of 8.1% with a coverage ratio of 84%. The company has been successful at growing its FFO at an annual rate of 6.5% over the last three years. Analysts are generally favorable towards the company with three rating WSR as a Buy and four analysts rating it as a Hold. WSR is a small cap REIT and does not yet have a credit rating but WSR does have a credit worthy balance sheet.
What About Current Valuations?
A number of REITs today have valuations that are getting close to "frothy" including some of those highlighted in this article. For quick reference, I've provided a summary table below for the five mopay REITs covered in this article.
Note: Analysts Rating read as Buy/Overweight/Hold/Underweight/Sell
CLDT has come well off its 52 week high and is currently priced closer to its 52 week low. I've been a buyer below $20/share recently. The driver for CLDT's recent drop in valuation is the soft economic growth in the U.S. stoking fears that lodging receipts will weaken in the next couple of quarters. I'm looking for long term income and the potential for continued dividend growth from CLDT so I'm comfortable with the trade off of a couple soft quarters for the opportunity to pick up shares of CLDT at lower prices.
LTC has come down a bit but not yet far enough for me to initiate a position. I have a target price of $45 on LTC. It has a ways to go to get down to where I believe is it provides a fair valuation.
O has come down almost 10% from its recent high but it still over valued in my opinion. I'll need O to get down below $54 per share (yield of 4.5%) before I get interested again in owning it.
STAG has had a good run up this year. As noted above, it is up more than 33% year to date. I already have a heavy position in STAG but would be a buyer again at anything under $23 per share (yield of 6% or better).
I believe WSR is a buy today and I had been buying at prices below $14 last week. At a yield of 8.1% or better, WSR is offering investors a handsome payment while waiting for the market to come to its senses with respect to its valuation. The consensus target price for WSR one year out is $16.50, more than 17% higher than today's closing price.
With the Federal Reserve making noises about interest rates, investors worried about the coming presidential election, and European financial institutions taking it on the chin, market volatility has come back. The dog days of summer are over. These five mopay stocks are all solid performers but are not all fairly valued at this time. With market volatility having picked up, I'm hoping for an opportunity to pick up shares of all of these five stocks at fair valuations.
Disclaimer: This article is intended to provide my opinion to interested readers and to serve as a vehicle to generate informed discussion in the comment posting. I have no knowledge of individual investor circumstances, goals, portfolio concentration or diversification. Readers are strongly encouraged to complete their own due diligence on any stock, bond, fund or other investment mentioned in this article before investing.
Disclosure: I am/we are long CLDT, STAG, WSR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.