This guide will briefly delve into the terminology and basics of dividend stocks and then present you with our pick for the five most lucrative monthly dividend stocks – their fundamentals, growth, and possible limitations to consider.
Dividend stocks are companies that make regular distributions to their shareholders. These companies are usually well-established, typically publicly-traded, with stable earnings and a long track record of paying out dividends to shareholders. The distributions are called dividends and are generally in the form of cash payments or as additional stock. Dividends are commonly paid on a monthly, quarterly, or yearly basis.
Dividend stocks can be valuable sources of income and present a lucrative method to increase your wealth over the long term, in addition to being a fantastic source of passive income. Dividend investing is a strategy of buying shares that pay dividends to receive a regular income stream from your investments on top of any growth in your portfolio as its stocks or other holdings gain value (share price appreciation).
Important: While dividend stocks are known for the frequency of their dividend payments, those dividends can be slashed to preserve capital in trying economic times.
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Assessing a dividend stock
Finding high-quality dividend-paying companies can be a challenge. Therefore, if you plan to invest in dividend stocks, it is essential to determine how sustainable, safe, and competitive the company is. So, here are some key metrics for evaluating a company’s dividend payout:
- Long-term profitability: Pick companies that have demonstrated consistent growth on an annual basis. Specifically, companies whose long-term earnings growth expectations range between 5% and 15%;
- Healthy cash flow: Cash flow represents the amount being transferred in and out of a company. Cash, of course, is needed to pay those dividends;
- Payout ratio: The payout ratio is calculated by dividing a company’s dividends by its net income, telling you what percentage of earnings a company pays to shareholders. A reasonably low payout ratio (60% or less) signifies a sustainable dividend;
- Dividend per share: The dividend per share is calculated by taking the total number of dividends paid by a business and dividing it by the total outstanding shares. This allows investors to get insight into the dollar amount per share;
- Dividend track record: Minimal five-year track record of solid dividend payouts signals continued dividend growth;
- History of raises: It’s a good sign when a company raises its dividend year after year, especially when it can continue during recessions and other challenging economic periods like the worldwide COVID-19 pandemic;
- Revenue and earnings growth: It’s vital to prioritize stability in the companies you consider. Inconsistent revenue (up one year, down the next) or scattered earnings can be signs of trouble;
- Competitive advantages: This is perhaps the most crucial feature. An enduring competitive advantage can come in several forms, including proprietary technology, high barriers to entry, high customer switching costs, or a solid brand name;
- Dividend yield: A high yield (between 2% and 6% is considered good) is preferable to a lower one, but only if the other criteria are met. A dividend yield is how much a company pays out in dividends annually divided by its stock price. A high dividend is only as strong as the company that sustains it, so compare dividend yields after ensuring the company is healthy, and the payout is stable.
Important: Beware of companies with a payout ratio above 80%, which can mean that a company spends more on dividends than it receives in earnings. In rare cases, dividend payout ratios can top 100%.
How to invest in dividend stocks
Building a portfolio of individual dividend stocks can be time-consuming, but it’s worth it for many investors. Follow these steps to buy dividend-paying stock:
- Find a stock. You can search for dividend-paying stocks on many financial sites or an online broker’s website;
- Evaluate the stock. Use the metrics above to assess your desired dividend-paying stocks;
- Determine how much you want to buy. It’s essential to diversify your portfolio if you’re buying individual stocks, so you’ll need to assess what percent of your funds goes into each share.
Monthly dividend stocks
Stock dividends are most commonly paid quarterly. However, some companies choose to pay these monthly or even annually. A company’s board of directors usually approves the dividend and then announces the payout date, the amount, and frequency of the dividend.
Investors can either reinvest dividend payments back into their portfolios or collect them as income. In particular, investors who use the latter option may prefer companies that pay a monthly dividend, as this will provide them with a consistent stream of income (presuming that the company stays profitable).
Next, we will look at the five best stocks that pay dividends monthly.
EPR Properties: 5.90% annual dividend yield (April 2022)
EPR Properties (NYSE: EPR) is a REIT specializing in owning experiential real estate such as movie theaters, eat & play venues, attractions, ski resorts, and fitness and gaming facilities. EPR Properties operates as a triple net lease REIT, meaning the tenant is responsible for paying the three main costs of real estate (taxes, insurance, and maintenance), dramatically reducing the company expenses.
EPR Properties was founded by Peter C. Brown on August 22, 1997, and is headquartered in Kansas City, MO.
Impact of the pandemic
Unfortunately, the COVID-19 pandemic had a powerful impact on experiential real estate, forcing many of these facilities to operate at a reduced capacity. The narrowed cash flow caused EPR Properties to suspend its monthly dividend in 2020. However, the rapid rollout of vaccines allowed a transition toward normalcy. As a result, EPR’s tenants could catch up on rent again, letting the company resume its monthly dividend in July 2021.
After facing the many challenges of a global pandemic, EPR is recovering firmly and still has many opportunities to drive its growth. While ERP Properties already offers an attractive yield, the company could increase that payout in the future as it expands its portfolio. Also, it entered 2022 with lots of liquidity and a strong balance sheet, giving it the cash to acquire more experiential real estate.
Amid the disruption from online streaming, the company wants to reduce its dependence on theatres. So it plans to acquire more attraction-related properties and focus on location-based entertainment that consumers can only experience outside the home – as a result, boosting its dividend’s long-term durability.
Gladstone Capital Corporation: 6.67% annual dividend yield (April 2022)
Gladstone Capital Corporation (NASDAQ: GLAD) operates as a business development company (BDC), focusing on investing in loans to lower middle-market businesses.
GLAD boasts a diversified portfolio in both deal sourcing and industry groups. At the end of 2021, it had a fair value of $577 million, with diversification across 47 companies and 14 different industries.
Gladstone Capital has a reliable track record of stable payouts, even during the recession of 2008. Thanks to its tax classification and favorable fundamentals, the company can maintain its high yield. In addition, similar to REITs, BDCs are required to distribute at least 90% of any taxable income, allowing capital gains to be passed through to shareholders.
The company was founded in 2001 as one of the first BDC funds, is headquartered in Virginia, and currently manages $3.4 billion in assets.
One of the most significant growth triggers for Gladstone Capital is rising interest rates, as most of its debt portfolio is in variable-rate securities.
It currently pays a monthly dividend of $0.0675 per share, after a 3.8% increase in April 2022. Previously in 2020, Gladstone Capital had cut the dividend by about 7%. As a result, the dividend is still not as high as pre-COVID.
Gladstone Capital’s dividend, assuming continued economic growth, appears sustainable. But the high payout ratio introduces a reasonably high risk, particularly during a recession.
Sabine Royalty Trust: 7.76% annual dividend yield (April 2022)
Sabine Royalty Trust (NYSE: SBR) owns royalty and mineral interests in a myriad of oil and gas establishments around the United States, with properties in Florida, Mississippi, Louisiana, New Mexico, Oklahoma, and Texas. SBR is a small-cap stock with a market capitalization of $947 million.
The company was founded on December 31, 1982, and 40 years since its inception has produced nearly 22 million barrels of oil and 275 billion cubic feet of gas.
In 2021, because of the energy market’s strong recovery after the pandemic, SBR grew its distributable cash flow per unit by 74%, from $2.28 to $3.97.
One of Sabine’s most significant growth triggers is the rising oil and natural gas prices, which have rallied to a 13-year high this year due to Russia’s invasion of Ukraine. The tight global supply, therefore, has helped form an ideal environment for SBR, which is likely to post a 10-year high distributable cash flow per unit this year.
However, whenever the war does come to an end, it will probably cause a sharp correction in oil and gas prices. In addition, the cash flows of SBR are highly cyclical due to the dramatic swings in the prices of oil and gas, which have resulted in a strikingly volatile performance record.
Apple Hospitality REIT: 3.35% annual dividend yield (April 2022)
Apple Hospitality REIT, Inc. (NYSE: APLE) is a publicly-traded real estate investment trust (REIT) that holds one of the most extensive and most diverse portfolios of upscale, rooms-focused hotels in the United States. Its portfolio consists of 219 hotels with more than 28,700 guest rooms located in 86 markets throughout 36 states.
The company’s portfolio is concentrated with industry-leading brands and consists of 94 Marriott-branded hotels, 119 Hilton-branded hotels, 4 Hyatt-branded hotels, and two independent hotels.
Apple Hospitality was formed in 2007 but began trading on the New York Stock Exchange on May 18, 2015.
Recovery from the pandemic
In 2016, the company increased its dividend by 50%, from a $0.80 rate to a $1.20 rate. However, the dividend was kept at the same rate until 2020, when the COVID-19 pandemic forced the business to cut its dividend and freeze it to a $0.20 rate for the year.
In 2021, the company reinitiated the dividend by paying it every quarter instead of every month as it did before. Nevertheless, starting in March 2022, the company reinstated its monthly dividends of $0.05 per share.
Apple Hospitality remains intently focused on maximizing long-term value for its shareholders and is confident it is positioned for additional upside as leisure travel continues to stabilize and business travel steadily recovers.
Last year the company increased its revenue by 55.2%, from $601.9 million in 2020 to $933.9 million in 2021. In addition, net income for 2021 was a profit of $18.8 million compared to a loss of $173 million in 2020.
The company has a solid balance sheet and has a debt to equity ratio of 0.5, which is sustainable for a REIT. Though interest coverage of 1.3 is a little low, it is still at a respectable level. In addition, the financial leverage level is 1.5, in line with the company’s past five years. Thus, all-around the balance sheet is strong and should give the company flexibility to continue to pay its dividend if a recession hits.
Realty Income Corp: 4.10% annual dividend yield (April 2022)
The clear leader for monthly dividend stocks is Realty Income (NYSE: O). It even labels itself as “The Monthly Dividend Company.”
The company employs a highly scalable business model that has allowed it to grow into a gigantic landlord of more than 11,100 properties. What’s more, Realty Income owns a highly diversified portfolio by industry, tenant, and geography and is considered a large-cap stock with a market cap of $39 billion.
As a result, the company boasts a 15.5% compound average annual total return since the 1994 listing on the New York Stock Exchange, a lower beta value (a measure of volatility) than the S&P 500 in the same period, and positive earnings-per-share growth in 25 out of the past 26 years qualifying it as a Dividend Aristocrat.
The trust’s growth history is remarkable. Fueled by gradual but steady annual rent hikes and a consistently strong acquisition pipeline, yearly growth has been constant across economic cycles, making it an excellent dividend growth stock.
Their best asset, though, is their solid balance sheet. With a credit rating of A from Standard & Poor’s, a high rating for a REIT, it can unlock value in significant acquisitions simply by refinancing the existing debt on the properties acquired at considerably lower interest rates.
The current dividend yield is well above the S&P 500 average, and Realty Income has done spectacular work at increasing the dividend payout over time. The company has paid over 600 consecutive monthly dividends without interruption and has raised the dividend over 100 times.
Monthly dividend stocks are a solid way for investors to earn passive income. That income, in turn, can be used to cover their monthly expenses or reinvested to set themselves up to generate even more recurring cash flow.
While many companies pay monthly dividends, these safe monthly dividend stocks stand out as leading options for those pursuing a lucrative income stream that can grow over time.
What are dividend stocks?
Dividend stocks are regular distributions of the company’s earnings to its shareholders. These companies are usually well-established, typically publicly-traded, with stable earnings and a long track record of paying out dividends to shareholders. The distributions are called dividends and are generally paid monthly, quarterly, or yearly.
What is the dividend yield, and why is it important?
A dividend yield is how much a company pays out in dividends annually divided by its stock price. For example, if a stock trades at $40 and a company’s annual dividend is $2, the dividend yield is 5%.
Generally, a high yield (between 2% and 6% is considered good) is preferable to a lower one. While higher-yielding dividend stocks provide more income, they usually come with greater risk. In contrast, lower-yielding dividend stocks deliver less income but are normally offered by more stable companies with a continuous record of consistent growth and steady payments.
How to evaluate dividend stocks?
Firstly, avoid buying stocks based solely on dividend yield and use the payout ratios to gauge a dividend’s sustainability. Next, study the balance sheet, including debt, cash, and other assets and liabilities. Finally, consider the company and industry itself. Is the company’s business at risk from competitors, weak demand, or further disruption?
What benefits does dividend investing present?
One of the primary benefits of dividend investing is the potential for double profits. On top of the potential price appreciation, shareholders also receive a dividend. Moreover, these companies typically increase their dividend annually, leading to a further passive income for the investor. In addition, dividend-paying companies are traditionally large-cap companies with stable earnings and low volatility.