This is a guest contribution by Bob Ciura of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth portfolios for the long run.
Despite the pandemic, the S&P 500 has nearly doubled off its bottom last year and is now trading near an all-time high. Consequently, it has become a challenge for investors to identify reasonably valued stocks with high dividend yields. Stocks with unusually high yields can be a sign that the dividend is at risk of being cut, meaning investors should not reach for high-yield stocks without researching the safety of the dividend payout.
Therefore, income-oriented investors should be especially careful in their stock selections. In this article, we will highlight three monthly dividend stocks which are also offering high yields, and long-term dividend growth potential.
STAG Industrial (STAG)
STAG Industrial is an owner and operator of industrial real estate. It is focused on single-tenant industrial properties and has 494 buildings across 39 states in the United States.
The focus of this REIT on single-tenant properties could create higher risk compared to multi-tenant properties, as the former are either fully occupied or completely vacant. However, STAG Industrial performs a strict screening process before signing a contract with its tenants. As a result, it has incurred credit losses that have been less than 0.1% of its revenues since its IPO, in 2011. Approximately 53% of its tenants are publicly rated and 31% of its tenants are rated “investment grade.”
As an owner of industrial real estate, STAG Industrial is supposed to be vulnerable to the coronavirus crisis, which has caused a severe recession. However, the REIT has proved remarkably resilient. It has collected about 99% of its rental income in the last 12 months and grew its funds from operations per unit 3% last year, from $1.84 in 2019 to an all-time high of $1.89 in 2020. Even better, it is on track to grow its funds from operations per unit by another 3% this year.
STAG Industrial has never cut its dividend throughout its 10-year history. It is currently offering a 4.3% dividend yield, which is more than triple the 1.4% yield of the S&P 500. Moreover, while the payout ratio of STAG Industrial rose to high levels during 2014-2016, it has reverted to healthy levels in the last two years, now standing at 74%. Furthermore, STAG Industrial has a well-laddered lease maturity schedule, with a weighted average lease term of 5.2 years and about half of the leases maturing after the end of 2025. As a result, its cash flows can be viewed as reliable in the absence of a severe downturn. Therefore, its dividend can be considered safe for the foreseeable future.
STAG Industrial has grown its funds from operations per unit at a 7.0% average annual rate over the last decade and at a 5.9% average annual rate over the last five years. Given also its generous yield, its healthy payout ratio and its decent growth prospects, it is a great candidate for income investors looking for monthly dividends.
Main Street Capital (MAIN)
Main Street Capital is a Business Development Company (BDC) that provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies. Main Street defines lower middle market companies as those that have annual revenues between $10 million and $150 million. Its customers use the funds of the company for acquisitions, recapitalizations, growth projects and refinancing.
Main Street acts like a fund for small companies and passes along the income and gains to its shareholders. In order to avoid paying a corporate income tax, the company has to distribute at least 90% of its net income to its shareholders. Consequently, it retains just a tiny portion of its income to reinvest in its business. During the last decade, Main Street grew its net investment income per share by 2.4% per year on average.
Main Street is currently offering a 6.5% dividend yield. Thanks to its high yield and its monthly payments, it is certainly a candidate for income investors. While the payout ratio has remained elevated for years, leaving less room for dividend growth in the near-term, the high yield above 6% is very appealing for income.
TransAlta Renewables (TRSWF)
TransAlta Renewables develops, owns, and operates renewable power generation facilities. It was spun off from TransAlta in 2013 and currently owns and operates 23 wind facilities, 13 hydroelectric facilities, seven natural gas generation facilities and one natural gas pipeline.
Generation of electricity from wind facilities used to rely on government subsidies but the cost of wind energy has greatly decreased in recent years thanks to technological advances. As a result, wind power has received a deluge of investment projects worldwide in recent years. TransAlta Renewables is ideally positioned to benefit from the secular growth of wind power.
Moreover, it owns and operates many hydroelectric facilities. Hydroelectric assets benefit from extremely long useful lives, often over 100 years, and exceptionally low operating and capital costs. Furthermore, TransAlta Renewables signs long-term contracts with its customers, with an average duration of approximately 12 years. Overall, the asset portfolio of TransAlta Renewables is undoubtedly attractive.
The stock is currently offering a 4.8% dividend yield, which is attractive, particularly given the healthy payout ratio of 69%. It is also worth noting that the company has never cut its dividend throughout its eight-year history. However, management has prioritized reinvesting the earnings into growth projects over dividend growth. As a result, the dividend has remained essentially flat in the last four years. Domestic investors should also note that the dividend is paid in Canadian dollars and hence they may experience fluctuations due to the swings in the exchange rate between the Canadian and the U.S. dollar.
Overall, TransAlta Renewables is offering a generous dividend yield, with a healthy payout ratio, but it is prudent not to expect material dividend raises going forward. On the other hand, it is only natural that the company prefers to reinvest its earnings in its business, as renewable energy projects are only in the early phases of their growth trajectory.
Final Thoughts
Due to the impressive rally of the broader stock market in recent months, income investors are struggling to identify attractive stocks with high yields. The above three stocks have many attractive characteristics, including monthly dividend payments and high yields. While these stocks have their own unique risk factors that investors should consider before purchasing, their high yields and monthly payouts make them appealing stocks for monthly income.
