Why not get paid monthly? When I first heard of stocks that paid their dividends monthly I was skeptical. After further analysis, I found there are some gems among the monthly dividend payers that can certainly give a portfolio a well needed dose of cash. Monthly dividends especially make life easier for those wishing to pay bills, budget, or spend in retirement. If many bills come monthly, why should dividend payments not be the same? Also, monthly dividend-paying stocks boost the magic that compounding can have on your portfolio and allows investors to acquire more shares and to perpetually increase portfolio income. Whatever the reason may be, income has been and will be the focus of many investors. What makes investing great is that every investor has different goals and different plans for getting there. Dividend investing and monthly paying dividend stocks in particular will hopefully help you attain those goals.
Overview of Monthly Dividend-Paying Stocks
When it comes to investing in monthly paying dividend stocks, investors should not focus so much on the prospect of getting monthly payouts that they allow themselves to purchase shares in sub-par companies. There are hundreds of companies out there that pay dividends monthly, which exist mostly in a handful of industries, including REITs, telecommunications and Business Development Companies.
When it comes to picking individual stocks among those that make payouts monthly, there are many risks that come into play. The most pressing issue for these companies will come with the rise of interest rates in the coming years and in 2017, because individual sectors REITs, telecoms, and BDCs often rely heavily on leverage in their operations. When interest rates rise, companies in these sectors will see their cost of doing business rise and their profit margins shrink overnight. Both of these factors can make dividends that were once dependable turn into ones that are eliminated.
When looking for dividend-paying stocks for a portfolio, whether it be monthly paying or otherwise, the main concern should be the relative strength of the company and therefore the strength of its underlying dividend yield. If investors seek the great income that can come with monthly dividend stocks, they should take their past and current financial statements with a grain of salt. When doing in-depth research on monthly dividend-paying companies, investors must look at their numbers with the effects of interest rate increases firmly in mind.
Ask yourself if the company's financing will drastically impact performance when interest rates continue to rise. Some companies will feel the painful effects of increased borrowing rates much more than others. Companies funded with a large amount of long-term debt will be better-positioned than those funded with debt that is maturing within this year or the next couple of years. As a whole, companies with a relatively low level of debt will perform better compared to those with lots of liabilities on their books. Despite the risks that rising interest rates pose too many monthly dividend-paying companies, monthly dividend payers are and will be a worthwhile option to add the portfolio income investors are looking for.
Above all sectors mentioned, real estate investment trusts are some of the most common types companies to pay their dividends monthly. REITs are already favored among dividend payers because they are required to pay out at least 90% of their taxable income as dividends. In return REITs do not have to pay any federal income taxes. One of the plusses for REITs that pay dividends monthly is that they can more easily manage their cash flows in a manner that keeps them above the 90% mark. When it comes to real estate investment trusts, there are two main categories. These categories are equity REITs and mortgage REITs. In today's current economic climate of interest rate increases, I suggest that investors focus on equity REITs which are far more conservatively financed then mortgage REITs.
Equity real estate investment trusts are those which generate earnings by owning physical properties and renting them to third parties. These companies operate properties which include, skilled nursing facilities, office buildings, retail space, entertainment facilities, restaurants, apartments, hotels, self-storage facilities, and much more. When it comes to equity REITs, the company's financing structure is important. However, what is even more important is the real estate itself that the company owns. For instance, real estate investment trusts that are heavily invested in the malls in the United States are facing extreme financial difficulties as the dominant mall retailers of old such as Sears (NASDAQ:SHLD), J.C. Penney (NYSE:JCP), and Macy's (NYSE:M) go by the wayside. This is due to the rise of both online shopping and competitive discount retailers. Investors in any REIT need to be wary of the specific risks involved with the real estate portfolio any company before you decide to pull the trigger and make an investment.
LTC Properties Incorporated (NYSE:LTC)
If I had to choose among the equity REITs for a company to invest in I would err on the side of consistency and secure earnings. The equity REIT that comes into mind with those considerations is LTC Properties Inc. LTC Properties is a great company for long-term income investors and those who wish to profit from the aging population of the United States. In the United States, LTC owns over 200 medical properties, which include skilled nursing facilities, and assisted living facilities. Over the years, LTC's management team has proven to be one of the best in the industry in allocating and managing capital.
LTC's management skill has also resulted in returns on capital and margins that are double to triple the industry average while maintaining modest amounts of debt. Over the last five years, operating margins have ranged between 51.9% and 65.8%, while their long-term-debt-to-capital has been an average of 46%. The results of LTC's strong capital management has also allowed the company to increase their monthly dividend every year since they started making monthly payments in 2005.
One characteristic I look for when evaluating equities for long-term income investments is their performance during the financial turmoil of 2008-2009. During the financial crisis, whether because of uncertainty of poor capital allocation decisions, many companies cut or reduced their dividend payments. Such actions proved devastating to share prices. Companies that maintained dividend payments through such times were well-managed and would be poised to weather any similar financial storm if it would come in the future. Not only did LTC maintain its dividend during the financial crisis, but it increased it. This was because of good capital allocation by management and the very assets the company owns. Skilled nursing facilities and assisted living centers have proved time and time again to be very resilient to the ups and downs of the market.
In addition, the nature of their assets and conservative approach to capital is also why LTC Properties Inc. has a minuscule beta of 0.13. Currently, LTC Properties Inc. trades at $45.27 a share. This gives their stock a price to earnings ratio of 21.44 and a dividend yield of 4.97%. Their monthly dividend payments are 19 cents per share. As of now, LTC Properties Inc. is a fair buy and would only become a better buy due to the interest rate increases coming in the future. Today, they was a slight pullback in the REIT sector due to the Fed's plans to make an interest rate hike on March 15. When looking at investing REITs this month and this year it is important to look for buying opportunities that fall around price fluctuations caused by the Federal Reserve and Janet Yellen. It is likely that with the low growth rate of the economy, the Federal Reserve is only going to make modest rate increases. Even though an interest rate increase will hurt the REIT sector as a whole, rates are still at historic lows, and it is going to take a few years before interest rates are back to average historical levels.
Meanwhile, mortgage real estate investment trusts are companies that derive their earnings from providing mortgages for real property owners. Mortgage REITs also receive income from purchasing existing mortgages in the marketplace. The main business model of mortgage REITs is to borrow money through short-term liabilities at short-term rates and have the mortgages they originate or purchase pay them a higher interest rate then their borrowing costs.
Since the business of mortgage real estate investment trusts revolves around interest rate arbitrage, these firms are particularly vulnerable to interest rate hikes. When interest rates rise, the margins for many of these companies will disappear overnight. Not only will mortgage REITs face thinner margins, but their financing will also play a key role into how badly they are hurt in 2017 and incoming years when interest rates rise. Many of these REITs are heavily leveraged even further to magnify returns to shareholders and to provide very high dividend yields. In recent history, these companies have done so well because interest rates have been near historic lows since 2008.
Business Development Companies
Another group of monthly dividend stocks to take into consideration are business development companies. BDCs are companies that invest in small and medium-sized businesses. When it comes to how these companies operate, they share many characteristics with private equity and hedge funds. Although BDCs are far different operationally from REITs, they share the same type of flow through tax structure. Like real estate investment trusts, BDCs must distribute at least 90% of their taxable income out as dividends, and in return they are not taxed federally. Although BDCs invest in wide ranges of businesses the investments they make are very high risk. Business Development Companies spend countless hours and millions of dollars to analyze companies they make investments in. Even after such allocations of time and resources, many of the underlying companies that receive investments go bankrupt within a few years. As a whole, BDCs are on the riskier side when it comes to looking for monthly dividend stocks. The main risk again is due to their dependence on financial leverage. As interest rates rise, BDCs will also see their margins shrink and have a much more difficult time satisfying all of their debt obligations.
Main Street Capital Corporation (NYSE:MAIN)
Of all of the BDC type stocks out there, the one I believe is worth the best look is Main Street Capital. Main Street Capital technically is considered a regulated investment company. The difference is that unlike a BDC, a regulated investments company does not have a set minimum payout ratio for payments to shareholders. However, regulated investment companies do have to pay occasional excise taxes to the federal government on some of their income. They also largely keep dividend payout ratios largely inline with their peers. Main Street Capital for instance has a payout ratio of 89.5%. To support such a payout ratio both currently and in the past, Main Street Capital has pulled of consistent earnings growth for the last six years.
Meanwhile, Main Street has also increased their dividend year over year for the past six years. Currently, Main Street trades at $36.96 a share and pays 18.5 cent monthly dividends, which gives them a dividend yield of around six percent on its regular dividends. If you count the additional 27.5 cent dividend that they pay in December their yield is closer to 6.8 percent. Compared to their peers Main Street is somewhat pricey on a valuation standpoint with a P/E ratio of 19.56 and a price to sales ratio of 12.06. When it comes to the debt on their book they are relatively even with their peers with a total debt to asset ratio of 41.53% and a total debt to equity ratio of 72.87%. On the other hand, the Main Street Capital outshines its peers with a net profit margin of 63.45%. In the end, the strong management of Main Street Capital also should be taken into consideration. The management of Main Street is so efficient that it keeps operating costs at a very low 1.4% compared to commercial banks at 2.6% and eternally managed BDCs at 3.2%. Their strong management team also allows them to make better lending decisions then the average BDC and take equity positions in many of the companies they are financing, which has led to increased returns.
As a whole, the margins of Main Street Capital are what separate it from its peers. If there is a firm among the BDC sector that I would buy, it would be Main Street Capital. Currently, I believe that Main Street Capital is slightly overpriced. I would personally wait for at least a slight dip before making a purchase. The earnings momentum of Main Street is what makes the company a worthwhile investment even when interest rates do rise. Due to the rise of interest rates, their earnings growth may slow, but their earnings momentum will allow them to continue to maintain and possibly grow their dividend in years to come. The management team is what makes Main Street Capital such a tempting investment as well. Not only does Main Street keep costs low, but they also make great financing deals with small and medium companies that allow them to have a great mix of debt and equity investments on their books and reap massive cash flows and capital gains to fund their dividends. As with LTC Properties, keep an eye out for the price dips that may come with the interest rate hikes likely coming this year. Even if their dividend does not grow, earning a six percent yield paid monthly provides a nice bit of portfolio income.
Another sector of the economy that offers monthly dividend payments is the telecommunications industry. Telecommunication companies make their money by providing voice calling, text messaging, and internet connectivity to consumers, businesses, and the government. Unlike REITs and BDCs, telecommunications companies do not have minimum monthly payout ratios and federal tax advantages. Rising interest rates could also harm the telecom sector. Another risk associated with the telecom industry is increased competition from competing companies. Many telecom companies are also saddled with large debt burdens which may prove to be a problem. On one hand, telecommunications companies are benefiting from the increased service demand, especially when it comes to wireless services. On the other, intense competition is driving prices down, and to cope with demand companies are forced to undergo massive spending projects financed largely by debt. In the future it will only become more costly for telecommunications companies to finance these projects as interest rates rise.
Shaw Communications Inc. (NYSE:SJR)
Of all of the companies that pay their dividends monthly in the telecom sector I would have to go with Shaw Communications Incorporated . Shaw Communications provides consumer with broadband cable television, internet, home phone, telecommunications services, engaging programming content, and satellite direct -to-home services. Shaw Communications Inc. is headquartered in Canada. Currently, Shaw serves 1.9 million internet customers, and 1.4 million phone subscribers and operates primarily in Canada. On the NYSE, Shaw Communications is listed as SJR. As a whole, Shaw is a capital intensive company which will face financial pressures if interest rates do rise in a meaningful fashion. What gives Shaw an edge over its competitors are its unique assets such as fiber networks. Also, within their regional market customers usually have few alternatives so this gives Shaw some pricing power compared to their peers who operate in more competitive markets.
Currently, Shaw Communications Inc. trades at $20.65 a share. This gives Shaw stock a price to earnings ratio of 33.75 and a price to sales ratio of 2.81. Today Shaw shares have a dividend yield of4.34% and a monthly dividend payment of 8 cents. Shaw also is relatively normal when it comes to volatility with a beta of 0.92. Shaw Communications is more conservatively financed then many of its peers with a total debt to assets ratio of 36.48 percent and a total debt to equity ratio of 98.51%. The margins of Shaw are also impressive compared to many of its peers with a net profit margin of 9.34% and an operating margin of 22.44%. At current price levels, Shaw Communications Inc. is fairly priced. As with LTC Properties Inc. and Main Street Capital Corporation you should stay on the lookout for price dips resulting from Federal Reserve rate hikes.
Monthly dividend paying stocks can be great investments for those looking to quickly add much needed income to their portfolio. No matter what a person's goals, monthly portfolio income should not be overlooked. Today, many brokerage services offer convenient online bill pay options that you can link to your portfolio. For retirees and many others this is the reason they begin investing in monthly dividend paying stock in the first place. On the other hand, monthly dividend investing allows you to compound your investment gains faster than traditional dividend paying stocks.
In the marketplace, there are some good and some bad monthly dividend paying stocks. Those that are especially exposed to high levels of debt are especially risky in the coming months and years. Companies with high levels of debt leave themselves with a low margin of error in their business operations. As interest rates increase, this margin of error will only become slimmer and slimmer. With that in mind it is far easier to sleep at night if monthly dividend stock you do end up purchasing has a relatively low level of debt.
It also needs to be mentioned that if you wish to receive monthly income from dividends you could invest in multiple equities whose dividend payment dates align so that you receive dividends every month. As stated previously, the dividend payment schedule of a company should not be held in too high of a regard in investment decisions. When making investment decisions people need to look for strong companies that happen to pay dividends monthly, rather than purchasing monthly dividends stocks that may or may not be strong companies. In the end, it always pays to invest for the long-term in quality companies, receiving monthly income is merely a nice bonus.
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Disclosure: I am/we are long LTC.
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.
Additional disclosure: This article is for informational and educational purposes only and should not be construed to constitute investment advice.