What’s better than a 6% return paid quarterly?
An annual return of 8% –paid monthly-of course.
These hidden gems aren’t easy to find, but they’re out there. While 99% of dividend payers in the market pay dollars quarterly or more, it is possible to find dividends that match our monthly bills.
Monthly dividends can be a “must have” in retirement. While working people can cash a check once or twice a month, retirees have no active income. (It’s the point retirement – less activity required!)
Our leisure and financial security are possible. We just need our money to work harder for us.
With that in mind, blue chip quarterly stocks are often short. They send “lump sum” payments. For example, a great January might be followed by a February and a lean March.
Some investors go through the complicated process of building a “dividend schedule” in which they hold specific amounts of specific stocks to ensure that their monthly payments balance out, but if just one of those stocks reduces their payments , this balance is shaken.
This is not the case with monthly dividend stocks.
See the table below. At the top is the dividend schedule for a 6.2% dividend yielding portfolio of “normal” stocks. Below is the income of a trio of dividend-paying stocks and funds producing the same amount, simply delivering it each month. Both generate an annual income of $ 31,000, not a nest egg of a million dollars, but on an investment of only $ 500,000– but it’s pretty obvious which way we would prefer:
Best of all, these dividends are paid by extremely consistent and reliable companies.
The question is: are these monthly dividend payers buying today? Let’s take a look at this 6.2% three-pack of returns to see where the best opportunities lie.
Pembina Pipeline (PBA)
Dividend yield: 6.8%
Calgary based Pembina Pipeline (PBA) has been part of North America’s energy infrastructure for more than six decades, engaged in the transportation, storage and processing of crude oil, natural gas, and natural gas liquids, primarily in western Canada. Canada, but also in parts of the United States.
It does so on 18,000 kilometers of pipelines, several natural gas and processing assets, and a bulk marine export terminal in Vancouver.
Like most of the energy industry, and especially many of its pipeline peers, Pembina’s shares crumbled during the COVID-19 downturn and are still not fully recovered to pre-pandemic prices.
Unlike too many of its peers, however, PBA has failed to pinpoint its monthly dividend throughout the crisis. He increased his monthly payout to 21 cents per share in early 2020, where it has remained ever since. This is a testament to Pembina’s abundant cash generation and strong balance sheet.
Pembina distributes energy, so at the end of the day it tends to trade with oil prices, which means we care about supply and demand. Well, according to the International Energy Agency (IEA) – the best source of industry information in my book – global demand for oil is expected to reach 96.4 million barrels per day. But the world’s oil supply is fair 93.6 million barrels per day.
This is another check mark for PBA, as is the fact that it is a corporation, not a Master Limited Partnership (MLP), which means we can avoid the dreaded Schedule K-1 at the tax time.
DNP Select Income Fund (DNP)
Dividend yield: 7.7%
It’s hard to be more reliable than the utility industry, whose components operate like virtual monopolies in one of the most boring but stable businesses on the planet.
Yet like California PG&E (PCG) and its 75% plunge over the past few years has taught us that no stock – not even a utility – is bulletproof. So, as with any part of your portfolio where the top priority is simply to avoid an implosion, you are probably better off spreading the risk.
the DNP Select Income Fund (DNP), a closed-end funds (CEF), does exactly that – and it does it in a way that many of its exchange-traded fund (CEF) competitors won’t or may not.
DNP Select Income invests in traditional electricity and water services such as Eversource Energy (ES), Southern Co. (SO) and American Water Works (AWK). But it also owns utility companies such as Crown Castle International (CCI), a real estate investment trust (REIT) that owns telecommunications infrastructure and leases it to companies like AT&T (T) and Verizon (VZ). And it even contains a few MLPs.
It goes even further by investing not only in stocks, but also in bonds, with 15% of the portfolio currently in debt and cash. And he also uses leverage (quite high at 25%) to amplify his exposure, which also allows him to achieve a high yield of 7.7%.
And yet, DNP underperforming a mere clue. What it offers in dividends, it lacks price appreciation.
DNP has underperformed a simple utility index over time. That’s bad enough, but consider this: DNP charges over 2.01% for expenses between management, interest, and other fees, compared to just 0.12% for the Utilities Select Sector SPDR Fund (XLU).
Of course, these fees are paid from their net asset value (NAV). They are also net of returns. We don’t care too much about the fees when performance pays for them. But it is not the case here.
Worse yet, at current prices, you would pay an almost 5% premium for DNP over the value of its net assets.
DNP’s monthly payments do not compensate for all these shortcomings. It’s not worth paying $ 1.05 for a necklace of her assets.
Real estate income (O)
Dividend yield: 4.1%
Could you ask for a more reliable monthly dividend than that paid by a company that is billed like “The Monthly Dividend Company”?
Realty Income presents the properties directly on its home page: 609 consecutive monthly dividends paid, 4.4% annualized dividend growth since 1994, 94 consecutive quarterly monthly payment increases.
What fuels this is a portfolio of over 6,500 properties leased to over 600 clients in 49 states, Puerto Rico and the UK These clients are spread across over 50 different industries, and although its primary tenants are essential operators such as Walgreens (WBA), 7-Eleven and General Dollar (DG), no customer represents more than 6% of annualized rental income.
Better yet, these agreements are almost exclusively “net leases”, that is, net of taxes, insurance and maintenance. Tenants take care of it, leaving Realty Income to simply sit back and collect a predictable and reliable stream of income.
However, physical retail has been looking risky for years. And while Realty Income focuses primarily on ‘necessary’ retailers such as drugstores and dollar stores that are expected to do well despite the e-commerce march, several of its big tenants – theaters and gyms – have received a blow. COVID they might never recover from.
Brett Owens is Chief Investment Strategist for Contradictory perspectives. For other great income ideas, get your free copy of his latest special report: Your early retirement portfolio: 7% dividends every month forever.