Real estate has been the worst-performing S&P 500 sector for the last five years, but the second-best-performing sector for the last six months. Now that the Fed has begun cutting rates, investors are once again amenable to more traditionally defensive assets like dividend-paying stocks and REITs.
As Cabot’s resident dividend expert, it should be no surprise that I like a regular stream of cash flowing into my wallet. Dividends are particularly nice because I don’t have to do much other than sit patiently for them to show up in my account. And monthly dividend REITs are even better because they’re much more like a regular paycheck than other dividend investments.
Granted, investments that offer monthly dividends are a bit rarer than those that pay quarterly or yearly dividends, but they are out there. And REITs, or Real Estate Investment Trusts, are generally some of the more stable investment offerings around.
The Benefits of Dividends and Monthly Dividend REITs
Let’s start with dividends. They’re really the secret behind some of the most lucrative investments.
Most stocks that pay dividends do so quarterly—that’s every three months. Public companies that send shareholders dividend checks every single month are rare. But the handful that exists tends to be laser-focused on rewarding shareholders and a source of very reliable income.
If you’re retired, stocks that pay dividends monthly are a perfect source of regular income you can use to pay bills, rent or buy groceries. Non-retirees also find monthly dividends attractive because they compound faster.
Keep in mind, however, that a monthly dividend is a nice bonus, but that shouldn’t be your main factor in deciding whether or not to invest in a company.
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You need to search for investments with timelessness and longevity—companies that are sure to not only be around 20 or 30 years from now, but still thriving. Dividend stocks become more powerful and usually make up a larger part of your annual return, the longer you hold on to them.
What’s so great about REITs? Alright, dividend stocks are good. What about REITs? REITs trade like stocks and give investors the advantage of participating in large-scale commercial real estate projects. REITs must pass 90% of their taxable income through to shareholders. In exchange, they pay no corporate income tax. They can own any type of real estate, and many specialize in one type, like apartment buildings, malls, office buildings, self-storage facilities or hotels.
Generally speaking, REITs tend to offer high income, portfolio protection, diversification, and liquidity. REITs typically have more defensive businesses that tend to hold up well in a bad economy.
Even when investors get optimistic and greedy, they still have one foot on safety. Nobody knows when the party will end and it is nice to own stocks built for a downturn, especially when they perform in an up market as well.
10 Reasons to Own Monthly Dividend REITs
- Steady income
- Accelerated compounding if you reinvest your dividends
- Dividend-paying stocks are usually more reliable
- Their value grows the longer you hold them
- They are often lower risk
- Even when the share price falls, you still have dividend income
- REITs bring diversification to your portfolio
- REITs give you access to a growing real estate market
- Good monthly dividend REITs can have high yields
- Conservative real estate stocks hold up relatively well in a bad economy.
Like any investment, it’s more important that monthly dividend REITs match your risk profile and are suitable for your investing needs. If that’s the case, prioritizing monthly payers over quarterly payers can make sense for the reasons above.
So which monthly dividend REITs do I like in today’s high interest rate environment, thanks to a year and a half of Federal Reserve rate hikes to curb inflation? Here are two that stand out.
2 Monthly-Paying REITs
Realty Income (O)
Yield 5.1%
Realty Income is one of the most popular and best-run REITs on the market. Cash flow from a conservative portfolio of 6,500 properties has enabled the company to amass a phenomenal track record of paying dividends—to such an extent that Realty Income actually has the audacity to refer to itself as “The Monthly Dividend Company.”
The large REIT has operated for 55 years and its 15,450 properties are rented to more than 1,300 different tenants in all 50 states, Puerto Rico, the United Kingdom, Italy and Spain. Since its 1994 IPO, Realty Income has amassed a record of one of the most successful income investments on the market.
Here are a few things to like about it.
- 11% average annual total return since 1995
- 652 consecutive monthly dividends
- 108 consecutive quarters of dividend hikes
- Sky-high credit ratings.
A great business formula delivers these results. Realty buys established properties and leases them back to tenants under long-term leases of 10 to 20 years. Most of these contracts are “triple net leases” whereby the tenants pay all the costs associated with the property including maintenance, insurance and taxes. This reduces unpredictable expenses and provides a rock-solid cash flow.
As a retail REIT, O took it on the chin during the pandemic—but unjustifiably so. The biggest tenants (Walgreens, 7-Eleven, Dollar General and FedEx) were considered essential services and remained open. Only a small portion of tenants, including restaurants, movie theaters and fitness centers, had trouble.
In the darkest days of the pandemic, Realty still collected about 85% of rents, and that number rebounded to 93.6% by the end of 2020. Earnings and revenues actually increased for the year because of acquisitions. Of course, the economy came roaring back and is still holding mostly steady.
The stock is still priced well below pre-pandemic levels – and even significantly below its 2022 highs – while earnings are better.
STAG Industrial (STAG)
Yield 4.0%
STAG Industrial, Inc. (STAG) is a REIT that invests in single-tenant industrial properties in the eastern and midwestern U.S. The property portfolio includes warehouses, distribution centers, and manufacturing facilities. It’s a diverse portfolio with 573 buildings in 45 different industries located in 41 states.
A couple of big things stand out about this stock. First, 31% of the properties are warehouses and distribution centers related to e-commerce. Those spaces are in huge demand and there isn’t enough supply to keep up. STAG is directly benefitting and will continue to benefit from the rise in e-commerce.
The other thing is that industrial properties are cyclical, which is good in a still-strong economy, and in high demand. Industrial properties are getting a boost from the surge in manufacturing activity in the country, a trend that may just be beginning. There is also huge growth potential. The U.S. market for industrial properties is estimated to be $1 trillion. As of now, STAG only has about 0.5% of that market.
To learn which dividend REITs I have in my portfolio right now, consider subscribing to Cabot Dividend Investor today.
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*This post is periodically updated to reflect market conditions.