Hi, I'm Austin, and I'm a dividendaholic.
I love dividends. I love passive income -- true passive income.
I owned a rental property once, and that was anything but passive. The hours I spent dealing with tenants, maintenance contractors, insurance providers, real estate tax appraisers, and so on, make me laugh anytime I hear an Internet guru proclaim rental real estate as a "passive income investment."
I bet most of those Internet gurus are making their money from selling you a course on real estate investing rather than from their own real estate investments.
In fact, many of the "passive" investments people on the Internet push are anything but passive. I've read side hustles described as a form of passive income. Apparently the irony of putting "hustle" and "passive" in the same sentence together is lost on some folks out there.
The most truly passive income investment would be something like an annuity, where you hand a financial institution a lump sum of money and they guarantee you a set amount of regular income in perpetuity.
It is true that my preferred source of passive income -- dividend stocks and other publicly traded income securities -- are not totally passive. They require research, monitoring, and occasional recycling. But once one's portfolio is established, the amount of ongoing monitoring and management required is so minimal (and, for me, enjoyable!), it still seems fair to call it "passive income."
The pinnacle of passive income from dividends are the rare monthly paying dividend stocks.
Why I Love Monthly Dividends
My friend and colleague Samuel Smith recently wrote an article titled "Why Monthly Dividend Stocks Are Overrated."
Shots fired!
Truth be told, Sam makes some good points. There are some incremental costs to paying a monthly rather than quarterly dividend. And he's absolutely right that investors shouldn't buy a stock just because it pays a monthly dividend.
The quality of the company and safety of its dividend should be far more important considerations than the frequency of the payout.
That said, there are some conspicuous benefits of monthly dividends as well.
If you're in the accumulation phase of your investment journey, receiving dividends monthly slightly increases the speed of compounding, allowing you to buy more shares more frequently. And if you're retired and withdrawing from your investment account, monthly dividends provide more income stability from month to month, helping you match your expenses.
It isn't purely emotional to prefer monthly dividends to quarterly, all else being equal.
That's why I've looked closely at every stock that pays a monthly dividend. I like monthly dividend payers, but I only want to own the very best of them.
There are some monthly dividend stocks like Stag Industrial (STAG) and EPR Properties (EPR) that are very popular with income investors, but I don't own them because I don't consider them high-quality, best-in-class names.
Don't get me wrong. STAG in particular has a very impressive record, handily beating the real estate index as represented by the Vanguard Real Estate ETF (VNQ) since inception:
(EPR's record has been less impressive over this timespan, mainly because its heavy concentration in movie theaters got shellacked during COVID-19.)
But while STAG has outperformed the real estate index, it has underperformed all of its industrial REIT peers.
It is true that STAG has taken great strides to improve its portfolio and balance sheet over the last decade. It is also true that over the last 1-year and 3-year periods, STAG has been near the top of the pack in total returns. But I think the primary reason for that is because the higher-quality, higher valuation multiple REITs get marked down more when interest rates are higher.
If interest rates recede, as I think they will, I believe STAG's peers will return to significant outperformance.
Also notably missing from the list below is arguably the most famous monthly dividend-paying stock of all time: Realty Income (O). This REIT has even trademarked the tagline, "The Monthly Dividend Company."
While O has an excellent track record of accretively absorbing ever larger amounts of real estate each year, I think O has become a victim of its own success.
CEO Sumit Roy insists that O's size and scale are an advantage. To some extent, that is true. But in my estimation, there is an even bigger disadvantage to this size and scale. The net lease structure, which includes minimal organic rent growth, requires exponential growth in assets just to generate linear growth in AFFO per share.
O's external growth has indeed ratcheted up exponentially.
When combining O's total real estate assets of over $55 billion and the total assets of its recently acquired Spirit Realty Capital (SRC) of $8.65 billion, the combined entity boasts a portfolio size of around $64 billion.
If you exclude the net lease casino REIT VICI Properties (VICI), O's real estate portfolio is now bigger than the next 8 net lease REITs' portfolios combined.
But the amount of high-quality net lease properties available for purchase (or sale-leaseback) does not grow exponentially. Thus, I've been arguing for a while now that O will have to do one of two things (or both) in order to keep up this exponential asset growth:
- Loosen its underwriting and quality standards
- Go outside of its traditional sphere of competence
I think both of these are happening, which I believe will gradually reduce O's valuation premium, raise its cost of capital, and lessen the profitability of each incremental investment.
This process will play out slowly over the course of years before many diehard shareholders realize that O's outperformance has turned into underperformance.
That's my reasoning. Maybe it'll turn out to be wrong, but I can't see how.
I did own O for almost a decade, but I don't own it anymore.
So what monthly dividend payers do I own?
8 Monthly Dividend Payers
Eight of my investments pay monthly dividends/distributions, although not all of them are common stocks. Since there's so many of them, I only have the space to give the briefest of pitches. As always, this should be the beginning of your research, not the fullness of it.
Agree Realty Corporation (ADC)
ADC is similar to O in that it is a single-tenant net lease REIT focused on the retail sector. But ADC is far smaller and can therefore be far more selective in its investments. The REIT boasts a best-in-class portfolio with nearly 70% of rent coming from investment grade retailers. It also maintains a best-in-class balance sheet with net debt to EBITDA in the mid-4x area and almost no debt maturing until 2028.
At the end of 2023, ADC raised $235.6 million in equity at a cost of around 6.6%, which I thought seemed pricey at the time. But ADC also deployed capital at a 7.2% cap rate in Q4 2023, and I find it likely that the REIT will be able to acquire at even higher cap rates in Q1 2024. So I believe ADC will be able to invest this equity capital at a decent spread to keep AFFO per share growth going.
Main Street Capital (MAIN)
MAIN is the perfect monthly paying companion to ADC, because as ADC generally benefits from falling interest rates, MAIN benefits from rising (or relatively elevated) interest rates. That is because MAIN is a best-in-class business development company ("BDC").
The business model is to issue equity and debt capital and extend loans at returns well in excess of its cost of capital. Rinse and repeat. MAIN's top-notch management team led by CEO Dwayne Hyzak does this extraordinarily well, using their strong cost of capital to invest in the highest quality deals.
What makes MAIN unique among BDCs is its stated desire to grow not only its regular dividend but also its net asset value ("NAV") per share over time. That tends to generate strong returns from both dividends and stock price appreciation over time.
Modiv Industrial (MDV)
MDV is a single-tenant net lease REIT focused on manufacturing real estate in economically essential industries like infrastructure, automotive, defense, and healthcare.
The REIT is finishing up its portfolio recycling efforts, selling its last few office properties in the near future, which should help it deleverage and lower its 6.7x net debt to EBITDA multiple. The good news on the balance sheet front is that MDV has almost no debt maturing until 2027.
Moreover, the REIT has very strong governance and a highly motivated management team led by CEO Aaron Halfacre. Insiders have made numerous open-market purchases of MDV stock since its IPO.
Gladstone Land 6% Preferred Series B (LANDO)
I love the idea of owning farmland, but the two farmland REITs -- Farmland Partners (FPI) and Gladstone Land (LAND) -- both have pretty poor records of generating AFFO per share and dividend growth. Farm property yields are just very low, leaving only a tiny margin of error and spread over cost of capital.
That's where LAND's preferred stocks come in. I bought LANDO at a lower price and an ~8% yield, and now I'm eyeing the higher-yielding 6% Series C (LANDP) to buy as well. Both pay preferred dividends monthly, but LANDP has almost 5x as many shares and therefore more liquidity than LANDO. Neither preferred series are likely to be called anytime soon, in my estimation, but as the smaller pref, LANDO is slightly more likely to be called, which is why it trades at a slight premium to LANDP.
While LANDO offers a 7.4% yield, LANDP yields 7.8%. Something about earning a 7%+ yield from farmland is extremely appealing to me.
WisdomTree US Quality Dividend Growth ETF (DGRW)
This one is a bit of an "honorary mention," because while it does pay distributions monthly, it is a variable distribution. The ETF owns 300 dividend growth stocks and pays out dividends as they come in from its holdings.
DGRW is one of the very few dividend ETFs that has beaten the S&P 500 (SPY) since its inception (admittedly, by a razor-thin margin):
The expense ratio of 0.28% could perhaps be lower, but you would be hard-pressed to find a higher quality grouping of dividend growth stocks than this. DGRW's portfolio is headed up by tech names like Microsoft (MSFT), Apple (AAPL), Broadcom (AVGO), and even Nvidia (NVDA), all in the top ten.
The ETF's quality and growth filters consistently find winners and allows them to run, similar to the way the SPY does. At a yield of 1.7%, you get a dividend yield slightly higher than that of the SPY while hopefully enjoying stronger dividend growth.
Reaves Utility Income Fund (UTG)
UTG is a utility-focused closed-end fund ("CEF") that also dips into the REIT and communications spaces for select stock picks to round out its portfolio. Like other yield-focused CEFs, UTG uses about 30% leverage to push up the net investment income. Right now, high interest rates are putting pressure on that strategy, but UTG looks more than capable of surviving until the Fed begins cutting rates sometime this year.
In the meantime, UTG's dividend yield of 8.6% looks safe.
DNP Select Income Fund (DNP)
DNP is another utility-focused CEF with strong management led by longtime (32 years) senior portfolio manager Connie Luecke. During her long tenure, DNP has not cut its monthly distribution once.
Like UTG, DNP is about 30% leveraged, but unlike the equity-only UTG, DNP is split roughly 85% stocks and 15% high-grade bonds. DNP's stocks are mostly utilities with some midstream energy and communications sprinkled in.
There has also been some insider buying of DNP over the last year, which boosts my confidence in this 8.7%-yielding CEF. When utility stocks recover, DNP should recover as well.
Cohen & Steers REIT & Preferred Income Fund (RNP)
Finally, of all of Cohen & Steers' real estate CEFs, RNP is my favorite because of its 50/50 mixture of REITs and preferred stocks. The prefs provide high income that increases net investment income and allows a greater share of the distribution to be paid from NII rather than capital gains. As we've seen over the last few years, capital gains are not always reliable for REITs.
That said, when REITs recover, RNP should recover as well. The ~30% leveraged CEF looks like it bottomed in October along with the REIT index and is now in recovery mode. The preferred stock holdings' upside to par value also provides fuel for further price recovery.
Bottom Line
Monthly dividends are great, but I reiterate my prior point that the more important characteristics of a potential investment are the quality of the assets, management, and balance sheet as well as the sustainability of that dividend.
As shareholders of Gladstone Commercial Corporation (GOOD), another net lease REIT that pays monthly dividends, found out a year ago, monthly dividends can be cut just like quarterly ones. GOOD has shed ~35% of its market cap since it announced its dividend cut in January 2023.
I picked the 8 monthly-paying investments you see above precisely because of their quality and my belief that they will be able to sustain their payouts -- and in the case of ADC, MAIN, and DGRW, grow them meaningfully over time.
If you want access to our entire Portfolio and all our current Top Picks, feel free to join us for a 2-week free trial at High Yield Landlord.
We are the largest real estate investment community on Seeking Alpha with over 2,000 members on board and a perfect 5/5 rating from 400+ reviews:
For a Limited Time - You can join us at a deeply reduced rate!
Start Your 2-Week Free Trial Today!
