Living Off Dividends With 4 Of The Best Monthly Payers In The Market

Includes: LNGG, O, OCSL, PGH
by: Efficient Alpha

Budgeting from the income off of a bond or equity portfolio can be tough when most investments only pay dividends or interest four times a year. Adding stocks that pay monthly dividends can be a way to supplement the regular quarterly income from other investments. The four stocks below provide a monthly cash return from three different industries and could be great additions to your retirement or income portfolio.

Income from stocks can supplement bond interest

Most stocks pay dividends on a quarterly basis and it is possible to budget around this payment schedule. The problem is that this often leaves one or two months with very little in income if fewer holdings pay out. Unless you are particularly apt at saving some money for the lean months, you could run into problems paying your bills.

There really is no need for that kind of stress when there are some very good names that pay dividends on a monthly basis. You will still need a good selection of quarterly payers, but with a little planning you can make sure that you do not have to worry about income in any particular month.

Linn Energy (LINE) (LNCO) is an oil and gas company that specializes in acquiring older producing assets and trying to increase production. The company just started paying dividends on a monthly basis in July but has a strong record of quarterly payments back to 2006. Seeking Alpha contributor Casey Hoerth recently looked at Linn's acquisition of the mineral rights for 6,250 acres in the Permian Basin of West Texas, for $525 million. Casey's calculation of the deal nets Linn Energy $300,000 per day and over $100 million per year.

Revenue grew by 9% over the last fiscal year and has jumped almost 550% since 2009 on acquisitions. Free cash flow has been negative over the last few years as the company increased capital spending to $3.7 billion in 2012 from just $139 million in 2009. This increase in spending should lead to higher cash flow, especially when capital needs for growth decrease. The stock has been slammed this year over questions about accounting practices around how the company classifies capital spending and how it calculates distributable cash flow. The accounting practice is widely used in the MLP space and has been done in plain view of investors and regulators. Linn may have to restate some financials but the restated data will not surprise the markets. I think it will ultimately prove to be a non-event. The shares pay an 11.9% annual yield and have significant upside on the acquisition of Berry Petroleum (BRY) and the resolution of the SEC investigation.

Realty Income Corporation (NYSE:O) is a diversified real estate investment trust (REIT) with six property types in 49 states. Approximately 78% of rental revenue comes from retail properties and 42% of revenue comes from five states. The company has been paying monthly dividends since 1994 and has consistently raised the payout. The dividend was increased to $0.18 per share in June, an increase of 20% over the prior payment.

One of the most important concepts for income stocks is dividend sustainability. A high payout means nothing if the company runs into financial stress and needs to cut. A dividend cut can cause the shares to plummet, leaving you with a loss on the price and an income stock that does not provide the income you were expecting. Seeking Alpha contributor Brad Thomas makes the case for Realty Income's dividend sustainability in a recent article. He argues the current $2.40 in earnings and the $765 million in annualized cash rent takes fears of a cut off the table and adds that the company's level of debt is below peers in the industry. Revenue grew by 13% over the last fiscal year and has averaged 10% over the last five. Free cash flow grew by 7% last year to $320 million on $7 million in capital spending on investments. The shares pay a 5.4% annual yield and leave enough cash for growth.

Fifth Street Finance Corporation (FSC) is a business development company that invests between $5 million to $75 million in small- and mid-sized companies. Investments can range from short-term loans and debt financing to an equity position. The company has not changed its dividend since January 2012, when it was cut from $0.11 to it current payout of $0.10 per share. Dividend cuts are more typical for companies like Fifth Street that basically spins off all its distributable cash flow each year. The company is able to tap liquidity through the debt market and equity markets to fund new projects each year.

Fifth Street recently raised almost $182 million in financing through an issue of 17.6 million shares. While a share issue is normally considered a bad thing for most stocks because it dilutes your ownership, it is normal for companies that pay out most of their earnings as dividends to regularly raise money through stock offerings. The economic outlook becomes very important for these stocks because they must be able to quickly raise money to pay off debt and fund investments. Even with less stability in the dividend amount, Fifth Street Finance should continue to pay a sizable yield.

Revenue was down 5% over the last fiscal year but is up over 300% in the last four years. The shares pay an 11.2% annual yield and an upside to the share price is possible as the company finds profitable investments.

Pengrowth Energy Corporation (NYSE:PGH) is a Canadian energy company that acquires, explores and develops oil and natural gas assets. The company has paid a monthly dividend since 2004 but has had to cut the payout amount over the last several years to fund higher capital spending. The yield is still high and should continue to reward investors as the company completes a restructuring. The company has been successful this year in meeting its asset sales target in a move to reduce debt and shift its focus to better performing fields. The shares popped 6% higher in July, when the company announced asset sales in southeast Saskatchewan and had total agreements to sell $673 million, part of which would go to funding the first phase of its Lindbergh project.

Revenue grew by 7% over the last fiscal year and is up over 27% since 2009 on a rebound in energy prices and a gradual improvement in the global economy. Free cash flow took a nosedive last year, falling $103 million as the company spends more on capital improvements. This growth spending has increased 140% over the last three years to $581 million in 2012 and should pay off down the road. The shares pay an 8.0% annual yield.

I would normally recommend no more than 35% of your portfolio in stocks if you are retired or dependent on income from your investments. The majority of your portfolio should be in safer fixed-income products and investments tied to real assets. Even this 35% can provide a significant income supplement to your budget. If you were to allocate a third of your stock portfolio to the four names above, assuming $500,000 in total assets, you could count on approximately $440 in additional monthly income.

Adding Realty Income Corporation to my Retirement and Income Portfolio

While any one of these four companies may be worth a look, I am only adding Realty Income Corporation to my Retirement and Income Portfolio. The company benefits from good geographic diversification across the U.S. and some property-type diversification across retail and distribution properties. Occupancy has been strong at better than 96% over its 44-year history and the company has just $4.1 billion in debt against a market cap of $13 billion. The dividend is safe and I think investors can count on stable growth over the long term.

The addition follows Kinder Morgan Energy Partners (NYSE:KMP), which was added on October 1, and is one of the most undervalued income stocks in the market. I will probably add a position each week for a maximum of 10 holdings. While these should probably not be the only stocks in your retirement or income portfolio, I think they are great choices and should provide a significant yield over your investment horizon.

Retirement and Income Portfolio

Disclosure: I am long LINE. 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.