3 Big Dividends, Paying Monthly, For Your Retirement Base
Summary
- A monthly income stream provides a lot of flexibility for the income investor.
- Monthly dividends makes DCA work even better.
- Three picks with reliable monthly dividends.
- Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Learn More »
Co-produced with PendragonY
When financial needs come knocking, often unexpected and unwanted, you need an answer to them. Needing cash is not optional, especially when it comes to major unexpected financial needs.
You're likely familiar with "Murphy's Law": "Anything that can go wrong, will go wrong." Cars break down, plumbing leaks, furnaces break when it's cold, the AC breaks when it's hot, and Mr. Murphy always puts his law to work at the most inconvenient times.
We live in a time that when it rains, it pours. So when you need to generate cash, how can you do so?
You can generate cash two ways from your portfolio in a time of need.
- Withdrawing cash from dividends
- Selling shares of securities that you own
Many investors who buy with a focus on potential capital gains must rely on the hope that someone else will buy their shares for more than they paid for them and that Murphy's Law comes around only during market upswings. Otherwise, they're raising cash by locking in a loss. In contrast, the dividend investor has the power to redirect a portion of their returns as needed to help with life's needs.
Holding an array of assets is often used to reduce the chance of needing to sell something at a loss to raise cash. This is an ever-present risk for investors who seek capital gains. The market is not linear, and a higher share price is not a guarantee. The quest to find the right mix of securities so you are never selling assets at depressed prices is an endless pursuit for them.
On the other hand, you can invest in dividend-paying stocks that pay you a regular income. With these investments, you can build a portfolio that allows you to take out what you need and reinvest the rest. Instead of selling the positions in your portfolio, you're adding to them over time or maintaining the same amount if all the income is needed. Having substantial cash flow from your portfolio gives you the flexibility to decide how much to reinvest, where to reinvest it, or how much you need to pay expenses. This freedom will make retirement considerably less stressful. No more watching the market every day to determine the right time to sell. No more gaming the market like a stressed-out gambler with a losing hand at a poker table. You can't bluff life or expenses.
This is the beauty of our Income Method. You have the flexibility to direct cash flows from your portfolio to both pay your expenses and grow your holdings. You can do this regardless of whether it is a bull or bear market. Both become opportunities to work within, not times of stress and fear. This gives you more control and frees you from worrying whether or not the market will be up or down on a day when you need cash.
Using Monthly Payers as a Base
Most bills come every month. And the majority of jobs pay once a month, if not more often. So it can be a big change when you start paying your expenses from the dividends and interest generated by your portfolio. Many dividend payers pay only once a quarter (and especially outside of the U.S. even less frequently). Budgeting when you have payments each month is easier and more familiar.
For those who aren't yet living off their portfolios and those who have extra income to invest and grow their portfolios, monthly payers offer another advantage. DCA (dollar cost averaging) is an investment strategy where you make small, regularly spaced purchases. The idea is that with small regular purchases, you will avoid investing all your cash at high prices. And since you're investing roughly the same amount of money, your average price paid will be less than the average price of the stocks you buy over that time. That's because you will buy more shares when the price is low and fewer when the price is high.
Now, of course, you can practice DCA with quarterly payers too. But DCA works better with smaller, more frequent purchases. So 12 purchases will most likely give you a lower price than dividing that cash up into just four purchases over the same period. And with the monthly payers, compounding will happen just a little bit quicker as well.
Dividend payments also can help investors avoid panic. And even the best of plans can be destroyed by decisions made in a panic. With a monthly dividend payer, you get your confidence-building dividend payments at a faster pace, giving you less time for doubts and panic to undermine your plan.
Below are three picks that pay a reliable dividend each month.
Pick #1: PTY - Yield 7.3%
PIMCO Corporate & Income Opportunity Fund (PTY) has been my favorite PIMCO CEF (Closed-End Fund) for a very long time. It's an investment that has never failed me, churning out a monthly dividend regardless of what is happening in the market.
When it comes to CEFs, management is perhaps the most important factor to consider. Especially with an actively managed fund like PTY. It is not your traditional bond fund that loads up bonds of a certain type and holds to collect interest. That strategy is not terribly profitable with interest rates so low. Instead, PTY is an active trader in the bond markets. Buying and selling bonds, investing in "special" situations, and using its elite team of researchers to identify opportunities before the rest of the market finds them.
PIMCO is the best management in the business, and PTY is PIMCO's best-performing fund of all time.
Source: PIMCO
Since its inception in 2002, PTY has had an average annual return of nearly 14%. Nineteen years of providing consistent and high returns with a bond fund through all sorts of turbulence in the bond markets is remarkable. It has also led PTY to dramatically outperform the S&P 500 (SPY) in the long run.
This is why PTY is my favorite CEF and one I never hesitate to buy a few more shares in. I've bought PTY on dips, and I've bought at a few of the peaks too. Throughout the years, I've added a little here, a bit more there at 10%, 20%, 30%, even 40% premiums, and I haven't regretted a single share. Every single one of those shares pays me $0.13 every month.
Source: Dreamstime
Pick #2: RNP - Yield 5.6%
Cohen & Steers is one of the best managers active in the REIT sector and has an impressive track record. Investors benefit from their expertise. Cohen & Steers maximize shareholders' returns by overweighting solid REITs and taking advantage of unjustified pullbacks. RNP is trading at a modest 4% discount to NAV. Both NAV and price have benefited from the recovery in the REIT and preferred sectors.
Cohen & Steers REIT & Preferred Income Fund (RNP) is one of the best Property REIT CEFs (closed-end funds) out there. Its objective is "high current income" and a secondary objective of "capital appreciation." To achieve this, they invest in real estate and diversified preferred securities. The fund will invest in both U.S. and global positions. Primarily most of the portfolio has been held in U.S. investments. Currently, only 20% of the fund is invested in preferred securities of non-US companies.
The fund is a great way to get REIT and preferred exposure in one fund. Both security types provide cash flow for income-focused investors.
Source: Fact Sheet - June 30th
RNP has managed its portfolio very well. The NAV (net asset value) is up about 9% from the start of 2020, fully recovering from COVID. Over the last five years, NAV has increased nearly 18%, and over the last 10, the NAV has increased an impressive 60%.
Source: Fact Sheet - June 30
And the distribution has never been cut, even during the Great Recession. In October of 2016, RNP switched from a quarterly payment of $0.37 to a monthly payment of $0.1240, but that was a slight increase.
Pick #3: THQ - Yield 5.6%
Tekla Healthcare Opportunities Fund (THQ)
Healthcare companies provide necessities and, as such, are recession resilient. By the same token, they're also inflation resilient. These companies tend to hold their own in inflationary times because people must continue to purchase necessary items to maintain a minimum standard of living or enjoy a healthy life. These companies easily pass the cost of inflation to the consumer as it kicks in. For example, drug companies immediately increase their prices when their cost of production goes up, which makes them great to hold as inflation hedges in times like today.
The chart below shows the performance of THQ since inception and displays the recession of 2020 in gray.
Tekla Healthcare Opportunities Fundis one of my favorite healthcare CEFs. Its portfolio is composed of large domestic and international healthcare companies. The fund also has exposure to fixed-income securities holding corporate bonds of both U.S. and international companies. The fund's international exposure is primarily in Europe, Japan, and Australia.
The fund's 10 largest holdings are all well known: Johnson & Johnson (JNJ), AbbVie (ABBV), UnitedHealth Group (UNH), Abbott Laboratories (ABT), Anthem, Inc. (ANTM), Cigna Corporation (CI), Medtronic PLC (MDT), and Merck & Co. (MRK), Thermo Fisher (TMO), and Bristol-Myers (BMY).
Source: Tekla
When we look at THQ's portfolio, we can see that all of its top-10 holdings pay dividends, although at a rate lower than THQ's 5.6% annual yield. As a result, THQ is an excellent choice for income-seeking investors looking for diversified healthcare and pharmaceutical exposure.
THQ has a distribution policy to pay a $0.1125 monthly distribution to investors, amounting to a 5.6% annual yield at the current market price. This distribution is paid in cash and is eligible for dividend reinvestment.
THQ was started in 2014, making it one of the newer Tekla funds. Since its inception, the NAV has increased just over 25%. This is a strong indication that the distribution, which has never been reduced, is well covered.
Source: Dreamstime
Final Thoughts
Monthly dividend payers make an excellent base for an income portfolio. Regular, reliable, and recurring monthly income to meet you where you are and where your needs exist.
Each of our three picks has a balance sheet and cash flow that supports the dividend. The regular monthly payments can be used to pay an investor's expenses or can be used to purchase dividend-paying securities opportunistically.
By designing a sustainable income stream, you will sleep peacefully at night knowing that you can withdraw your funds without exiting your investments. This means you're not cutting your portfolio off at its knees and expecting it to keep performing as before. You keep it whole, skim the excess cream off the top and let it keep on trucking.
Most importantly, you may be assured that your income stream is significant and increasing, providing you years of maximum flexibility. When you get to the heart of the matter, the purpose of investing is to provide financial stability. You need to feel secure knowing that your financial needs will be met today and in the future. By making the long-term viability of your income source your top priority today, tomorrow, you will be thanking yourself. Years from now, you can look back at today as the day you made the rest of your life better.
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This article was written by
Rida Morwa is a former investment and commercial Banker, with over 35 years of experience. He has been advising individual and institutional clients on high-yield investment strategies since 1991.
Rida Morwa leads the investing group Learn More.Analyst’s Disclosure: I/we have a beneficial long position in the shares of PTY, RNP, THQ either through stock ownership, options, or other derivatives. 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.
Treading Softly, Beyond Saving, PendragonY, and Preferred Stock Trader all are supporting contributors for High Dividend Opportunities.
Any recommendation posted in this article is not indefinite. We closely monitor all of our positions. We issue Buy and Sell alerts on our recommendations, which are exclusive to our members.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (229)
How do you identify the right and wrong times for leverage?
There is that old saying that one has to make hay while the sun shines. I pity the followers of that Pied Piper from Dallas who advised them to get out of the market, and they missed out on the great market rally in history.
Like many readers here, I was always waiting for CEF to come down to lower premium if not discount, so that I can purchase a small quantity but noticed over the period.
After waiting for a long period, I purchased PTY when it was trading at ~18% premium with full conviction and enabled DRIP as well as adding 10/15 units every time I see price favorable to me.
Doesn't mean one should add at any price/premium but if you are on side lines, you will be missing on some good stocks/CEFs/ETFs to add in your portfolio.
Hope others evaluate their own risk/reward proposition and be prepared to pull the trigger.
They have high expense ratios because you have a team working for you! Your yield is after all expenses. THQ is currently yielding about 6% and you buy Cohen and Steers, one of the most nimble CEF managers, on market dips, as I did with the preferred fund, at a yield on cost of 7%. After expenses!
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@DMLJMD CEFs are required to distribute the majority of income AND capital gains. With NAV growing so quickly, it is very likely that THQ will be forced to raise the dividend.
