This is a guest contribution by Josh Arnold of Sure Dividend.
In the world of investing, compounding matters. This allows investors to stack future returns on top of prior returns, increasing gains over time. Not only does compounding matter, but the frequency of compounding makes a difference as well. Quarterly dividends allow investors to make purchases with cash distributed from their portfolios four times a year; monthly dividend-paying stocks allow investors to theoretically do this 12 times annually. This can result in a greater compounding effect, which can then boost returns over time.
But many monthly dividend-paying stocks are very risky, meaning they may not be suitable for most investors. In this article, we’ll take a look at three monthly dividend stocks that are among the safest in the group to give investors interested in monthly dividends a good place to start.
Safest Monthly Dividend-Paying Stock #3: STAG Industrial (STAG)
The first stock in our list is STAG Industrial, real estate investment trust, or REIT, that owns and operates industrial properties. The trust focuses on single-tenant properties that cater to customers that generally use their spaces to support e-commerce. This gives STAG a leg up on its competitors that are leveraged to physical retail, which has been slowly declining for years. STAG has been publicly-traded since 2011 and has a $3.9 billion market capitalization. It owns nearly 400 properties in 38 states.
The trust’s Q1 results from 4/30/19 showed strong growth in core funds-from-operations, or FFO, adding 4.7% over the comparable period last year on a per-share basis, from $0.43 to $0.45. The trust grew its FFO on a dollar basis by 21% in Q1, but that was mostly offset by a 16% increase in its share count.
The trust acquired 10 new buildings for $185 million at an average capitalization rate of 6.6%; it also divested five buildings to partially help fund those purchases. STAG’s occupancy rate was 95.2% as of the end of the quarter.
We see STAG growing its FFO-per-share at a rate of 6% in the coming years, which is consistent with its historical growth. The trust continues to acquire new properties and maintain a high occupancy rate. In addition, we like its leverage to e-commerce rather than physical retail for the long-term.
STAG wasn’t publicly-traded during the last recession, so it is difficult to estimate the impact of the next downturn. However, the company’s leverage to e-commerce and not physical retail should help it weather the downturn more effectively than REITs focused on malls or other shopping centers.
The dividend is currently about 76% of FFO-per-share, as we see a $1.43 dividend this year on $1.87 in FFO-per-share. STAG’s beta to the broader market is just 0.5 as well, so it offers a diversifying component to investors that own a broad base of stocks, and reduces volatility in the portfolio. We see STAG producing high single digit total returns in the coming years thanks to its robust growth outlook, and 4.7% dividend yield, partially offset by a slight decline in the valuation.
Safest Monthly Dividend-Paying Stock #2: EPR Properties (EPR)
Our second stock is EPR Properties, another REIT, but one that invests in properties that are in the entertainment, recreation, and education sectors on a triple-net basis. EPR’s focus on specialty properties has afforded it very high returns over time despite what sounds like a riskier portfolio of assets than many other REITs. EPR’s specialization allows it to carry extremely high occupancy rates of 99% or more. EPR has 320 locations in 41 states with 250 different tenants, and it trades with a market capitalization of $5.7 billion.
The trust’s Q1 earnings report from 4/29/19 showed better-than-expected results on the top and bottom lines. Revenue rose 6% against the comparable quarter last year thanks to strong rental income. Operating expenses were in-line with the prior year’s Q1, meaning adjusted operating margin was essentially flat. EPR’s share count actually fell year-over-year, which is abnormal given it issues shares to fund purchases, but that helped FFO-per-share increase dramatically, rising from $0.82 to $1.23 during Q1.
We see the trust earning $5.40 per share in FFO this year, which is the midpoint of its guidance. We also see it growing at 8% annually given its robust track record of expanding its high-quality asset base and generating strong returns from those assets.
We’ll caution that EPR suffered rather severely during the last recession as its FFO-per-share fell by more than 75% during 2009. However, FFO rebounded quickly beginning in 2010.
We see EPR producing low double-digit total annual returns in the coming years as its 8% FFO-per-share growth is slightly offset by a valuation that should drift lower over time. In addition, it sports a highly-attractive 5.9% dividend yield, which is the highest in this group. Finally, its beta is just 0.5, so it also offers a diversifying effect on one’s stock portfolio.
Safest Monthly Dividend-Paying Stock #1: Realty Income (O)
Our final stock is Realty Income, a REIT like the other two stocks in this list, but one that focuses on standalone retail properties. Realty has become very famous for its monthly dividend, which has been paid 587 consecutive times. It owns more than 4,000 properties and trades with a market capitalization of more than $22 billion. Realty, unlike the other two stocks in this list, is a part of the S&P 500 index.
Realty shared Q1 results on 5/1/19 and its operating performance was quite strong. Revenue was up 11.3% year-over-year as Realty saw strength from new investments, as well as organic growth from its existing properties.
FFO-per-share rose slightly more quickly than the share count, which, like many other REITs, Realty uses to fund acquisitions. FFO-per-share came in 2.5% higher at $0.81 in Q1 thanks to FFO growth over and above the rising share count.
Based on a new guidance range of $3.28 to $3.33, we are now expecting 2019 FFO-per-share of $3.31, which implies 4% growth from 2018.
Realty Income performed extremely well during the Great Recession despite its reliance upon physical retail. We don’t see recession as a meaningful risk to Realty’s FFO and thus, we also see its dividend as very safe. The payout ratio for this year is 83%, but that is low by the trust’s own standards. Given its extraordinary history of paying – and increasing – its monthly dividend, we see Realty as the safest of the monthly dividend stocks.
We are forecasting somewhat lower total returns for Realty as its valuation is higher and thus, its yield is lower than STAG and EPR. Indeed, we see the trust’s forecast growth of 5% being largely offset by a declining valuation. Thus, the bulk of total returns will accrue from the stock’s 3.9% dividend yield. Realty’s beta is also just 0.5, so for investors looking for an exceptional dividend history and outlook, with relatively low volatility and monthly payments, Realty is a strong choice.
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