5 Monthly Dividend Stocks Buys And 2 To Avoid

by: Todd Johnson

Many investors seek a regular monthly dividend income stream. As with life, bills and expenses tend to require monthly payments. My personal pursuit is to match monthly dividend income to known monthly expenses. In this article I will highlight seven dividend stocks which pay monthly dividends.

Avoid ARMOUR Residential REIT (ARR)

ARMOUR Residential is an agency mortgage real estate investment trust (MREIT). The company’s mortgage backed security selection is externally managed by ARMOUR Residential Management LLC. ARMOUR Residential invests in hybrid adjustable rate, adjustable rate and fixed rate residential mortgage backed securities issued or guaranteed by a U.S. Federal Government chartered entity. These entities include Fannie Mace, Freddie Mac, and Ginnie Mae.

Jeffrey J. Zimmer, since 2008, has served as the co-chief executive officer of ARMOUR Residential Management LLC. Mr. Zimmer has been the co chief executive officer, co vice chairman, President and chief financial officer of ARMOUR Residential. Mr. Zimmer was the co founder and chief executive officer of Bimini Capital Management (OTCQB:BMNM). Bimini subsequently fell from $15.94 to a current price of 43 cents per share. This was due to Mr. Zimmer’s decision to use shareholder funds to move out of agency mortgage backed securities into riskier assets classes.

Mr. Zimmer regained investor confidence and assisted in the reverse split public offering of ARMOUR Residential. The company currently pays an 11 cent per month dividend. This equates to an annual 19.2% dividend yield.

I believe investors should avoid ARMOUR Residential shares due to the common share premium to book value per share. The stock closed December 16th at $7.02. The September 30th, 2011 book value per share was $6.78. The stock is trading at a 3.5% premium to book value.

Per a December 12th SEC filing, ARMOUR Residential has filed a secondary offering for $6.80 per share. The $6.80 will be dilutive, after expenses, to the September 30th book value per share of $6.78. Typically agency mREIT offerings are desirable if offered at a premium to book value per share. If a secondary is dilutive to book value per share, then current shareholders suffer the consequences.

Buy Baytex Energy Corp. (BTE)

Baytex is a conventional oil and gas company based in Canada. The former Canadian trust converted to a Canadian corporation due to trust law changes. Baytex is engaged in the acquisition, development and production of oil and natural gas in the Western Canadian Sedimentary Basin. The company also has a presence in the United States. Baytex has achieved market beating returns based upon cost efficiencies, and premiere long term low cost drilling assets. The company focuses upon a strong balance sheet, organic growth, and paying an increasing dividend. Baytex is providing shareholders earnings growth and income growth.

Funds from operation growth indicate a steep and rapid increase. This will benefit shareholders in terms of organic earnings growth and dividend increases. The following table is from a recent December 2011 investor presentation:

The stock price has increased in recent days. On Friday, the stock jumped 6% on heavy volume. The current 22 cent per share dividend, paid monthly, equates to an annual 4.6% dividend yield. I would recommend investors attempt to establish a position in the sub $50 price range.

Buy Enerplus Corporation (ERF)

Baytex engages in the acquisition, exploration, development, and production of petroleum and natural gas in the Western CanadianSedimentary Basin. In addition, the company operates in the Marcellus area within the United States. The company, during the 3rd quarter, did miss production numbers. This miss was due to the weather and the inability for personnel to arrive at well head sites.

The Marcellus shale area and Bakken area, within North Dakota, remain an area of long term growth. The above chart indicates the stock pays a current 8.5% dividend yield. The dividend is paid monthly via 18 cents per share. Enerplus has not rewarded shareholders with the significant out sized gains that its peer, Baytex, has delivered for past performance. Enerplus should be viewed as an income story versus a growth and income story. This may change if the oil and natural gas production can beat production estimates in future quarters.

I would advise potential shareholders to try and obtain a $23.00 per share entry price. The company has reliably paid monthly dividends. The management team needs to establish that production is back on line with company forecasts.

Buy Gas Natural Inc. (EGAS)

Gas Natural has a business model focused upon a necessary service. Gas Natural provides energy and natural gas via utility services. The company has over 63,000 customers from Montana to Maine. The company has chosen to identify small and emerging markets to enter, through acquisition and expansion. Current operations are based in Montana, Wyoming, Ohio, Pennsylvania, Maine and North Carolina.

The company pays a 4.5 cents per month dividend. This equates to an annual 5% dividend yield. The ex-dividend date was December 13th. The dividend will be paid on December 30th.

I like the business model. Everyone needs utilities. I believe the yield, however, lacks enough pull to buy at current prices. I would like to see the company increase its monthly dividend. The 4.5 cent per month dividend has been paid since April 2009. I advise investors attempt to establish a buy position at $9 to $10.25. The company has not traded this low for 52 weeks. There simply isn’t enough upside to warrant a position at current levels.

Buy Realty Income Corp. (O)

Realty Income is a real estate investment trust focused upon premiere brand names. Properties are rented primarily under triple net lease agreements. The owns over 2,500 properties located in 49 states. The occupancy rate remains high at over 97%. The stock typically pays a 6% to 7.5% yield. The current 5% yield indicates the stock is over bought and investors should wait for a lower entry price.

The company, on December 13th, raised its monthly dividend from$0.1451875 per share to $.1455 per share. As an investor, I am interested in the annual dividend share increase. The company currently pays an annual 5% dividend.

I recommend shareholders attempt to purchase shares in the $30 to $31 price range. Realty Income is a premiere real estate investment trust. I believe shareholders deserve a higher return than 5% as shares trade near 52 week highs. I believe the current valuation leaves little upside and about 10% exposure on the downside.

Buy Whitestone REIT (WSR)

Whitestone REIT is a fully integrated real estate company that owns, operates and re-develops Community Centered Properties™. The properties are quality areas in established culturally diverse locations. The company focused upon creating shareholder value by redeveloping the properties to make the community properties worth more. Whitestone REIT focuses upon ensuring required services are also available, including medical and education facilities, for the community.

The company continues to selectively acquire new assets and properties for redevelopment. The size allows Whitestone REIT to ensure each property meets desired free cash flow rates for internal rates of return. Whitestone REIT pays a monthly dividend of 9.5 cents per share. This equates to a 9.6% annual dividend yield.

The stock has a limited history of trading. I believe the equity is a buy at the current price. The dividend offers a compelling 9.6% annual yield. The market cap requires investors to use a limit order. Although the yield is compelling, this small cap company requires close attention to ensure the company adheres to strong management oversight of properties.

Avoid Western Asset High Income Fund II Inc. (HIX)

Western Asset High Income II seeks to obtain high current income through investment in high yield debt securities. The closed end fund currently pays 8.3 cents per month. The net asset value is $8.23. The dividend yield is 10.44%. The fund owns over 400 positions to ensure one bond holding will not make a significant impact upon the upside or downside of the fund.

I recommend investors avoid Western Asset High Income II. The fund is selling at a 15.19% premium to net asset value. Over 98% of the assets are below an “A” credit rating. In a recessionary environment, the bonds are not the type of assets a conservative investor seeks or needs. I don’t recommend buying a closed end fund above its net asset value, and Western Asset High Income II is trading at a significant premium compared to the net present value.

The monthly dividend has decreased three times in the past 2 years. There are more attractive risk to reward investments than Western Asset High Income II.

I believe everyone has their own comfort level with individual securities. Ensure the risk versus reward warrants buying, holding, or selling a position. Your risk tolerance may be higher than mine. The end result is to end up at the same place. Dividends should provide ample monthly income to pay for food, living expenses, and discretionary spending.

Baytex is the premiere name on this list. The company has provided shareholders a 30% annualized total rate of return over the past 5 years. I recommend investors seek a purchase price in the mid $40’s to establish a position.

Disclosure: I am long BTE, ERF, WSR.

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