3 Monthly Dividend Stocks For A Growing Income In Retirement

| October 3, 2016 | 0 Comments

See these three stocks with rock-solid businesses that will deposit a check into your bank account every month and then also give you a payraise every year. If you own any other monthly dividend stocks, consider switching them out with the three Tim Plaehn shares today.

Income investors are naturally attracted to stocks that pay monthly dividends. Most U.S. based, dividend paying companies send out dividends on a quarterly schedule. For a lot of investors who have completed a working career and now rely on investment income, a monthly dividend check feels more natural.

However, some companies take advantage of the appeal of the more frequent dividend schedule and do not work to generate competitive investment returns when compared to their quarterly paying peers. Avoid the trap of buying stocks just because they provide those monthly payments.

Over the years, I have completed in depth analysis of hundreds of dividend paying companies. My overall impression of the majority of monthly dividend stocks is that they use the monthly payment hook as a smoke screen to cover less than impressive overall investment results. With so many disappointing returns from monthly dividend stocks, for me to add one to my recommendations list, one of these companies has to demonstrate significantly better investment potential compared to similar companies and stocks that pay quarterly.

business development company

The business development company (BDCs) sector is home to a significant number of monthly dividend payers. Out of the approximately 50 publicly traded BDCs, about one-third pay monthly. This group is a good example of using the more frequent dividend payment schedule to mask sub-par investment performance.

A BDC is a company that provides equity and debt financing to mid-sized corporations. Their clients are businesses not big enough to tap into the public stock and debt markets. BDCs provide a necessary source of small business capital, but they tend to serve higher-risk client companies.

A business development company operates under a special set of tax rules that allows them to not pay corporate income taxes. As with other pass-through business types like real estate investment trusts (REITs) a BDC must pay the majority of its net income out as dividends to share owners. Unfortunately, the tax rules do not allow a BDC to build reserves against loan losses and the riskier nature of a BDC’s investments inevitably leads to loan losses and an erosion of investor equity.

As a result of these factors, the management team of a BDC must develop strategies to counter the unavoidable erosion of investor equity or net asset value (NAV) per share. To be blunt, many BDCs fail to sustain and grow their NAVs. They keep the business going by issuing more shares of stock and taking on more debt and using the capital to make more client investments. This growth strategy of using outside capital can mask the internal asset value erosion – for a while anyway.

Main Street Capital CorporationThe nature of the BDC business structure makes it very hard to find stocks in the group that will generate growing dividend payments and a stable or growing NAV. As a result, I recommend just one monthly dividend BDC. That company is Main Street Capital Corporation (NYSE: MAIN). This BDC has steadily grown its dividend rate and NAV since it went public in 2010.

The larger world of REIT stocks also contains a number of monthly dividend paying companies. The investment potential of each individual REIT depends on its chosen sector in the commercial real estate space and how well the company has carved out a profitable niche in that sector. Finance REITs focus on the debt financing of real estate purchases. These companies originate or own mortgage loans and/or mortgage-backed securities. As a blanket statement, I will say that to not lose your money, avoid all of the monthly dividend finance REITs. With equity –property owning– REITs, I look for companies that offer the best combination of current yield and dividend growth potential. Here are two that I have recommended in the past:

EPR PropertiesEPR Properties (NYSE: EPR) is a niche focused, net lease REIT that has used its expertise in three commercial property types to generate growth and great returns for investors. EPR owns multiplex movie theaters, private and charter school properties, and entertainment facilities including golf driving range centers and urban ski facilities. For investors, EPR has paid a steady monthly dividend with 8% to 10% increases in the dividend each year. The stock currently yields 4.8%.

Chatham Lodging TrustChatham Lodging Trust (NYSE: CLDT) is a hotel/lodging REIT with a strong history of growth since its 2010 IPO. The hotel sector is very cyclical, and currently, hotel owners are experiencing a period of basically flat year-over-year results. At some point, the cycle will turn up again. While we are waiting, Chatham Lodging pays a 6.7% yield with monthly dividends. The current dividend rate is well covered, with the company paying out less that 50% of FFO as dividends.

Income stocks seem like they have never been more important to investors until recently, with the Fed suppressing interest rates and banks paying almost nothing on savings. Many people have turned to higher yielding stocks out of a necessity for income that they thought they could rely on their bank account for.

But as I’m sure you already know, the average high-yield stock carries more risk than their lower yielding peers, and out of the entire universe of higher yielding stocks I would probably throw out three-quarters of them because they do not meet the criteria I have for safety of the dividend payment. And I almost exclusively invest in high-yield stocks!

That’s why I’ve decided to release a research presentation that I did the details an income stock sporting one of the safest 7% yields in the market.

Click here find out more about this 7% stock you can buy and hold forever.


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Category: Dividend Stocks

About the Author ()

Tim Plaehn is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter, an investment advisory delivering income investments with double digit growth in share price and dividend payments. Tim’s also editor of Weekly Income Accelerator, a covered call trading service, and Automatic Income Machine, a dividend growth service focused on growing your nest egg.

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