Wednesday, February 1, 2012

Monthly Dividend Stocks

Most dividend stocks trading in the US pay dividends every quarter. A few pay dividends semi-annually, while a very small minority (mostly ADR’s) pay dividends once a year.

From a dividend investment standpoint, I have always focused on strong fundamentals, strong competitive advantages, potential for earnings and dividend growth, and adequate valuation. You could read more about my entry criteria in this article. I never really focused on the timing of the dividend cashflows. As it stands out, it could be beneficial to own stocks that pay dividends monthly.

The perfect monthly dividend stock is Realty Income (O) – The monthly dividend company. Although the company is trading at a rich valuation, I would consider adding to my position in the stock on dips below $29. Check my analysis of this REIT.

The first benefit would be that it would make budgeting for expenses much easier. Investors would not have to wait for three months before obtaining their distribution from a stock, only to split them in three and then allocate an equal portion to spend each month. Knowing that the dividend income is coming once a month , would make life easier for retirees living off dividends.

The second benefit of monthly dividend stocks is compounding. By reinvesting dividends, investors use the power of compounding to increase their wealth. By increasing the frequency of compounding however, investors have a higher chance of increasing their net worth.

The main disadvantage of monthly dividend stocks is that investors are limiting themselves to a very small universe of stocks. As a result it would be difficult to find a company that is a good fit in a dividend retirement portfolio. Basically I am looking for a company with a stable dividend payment that is also growing. Most monthly dividend stocks I found were funds which paid fluctuating distributions. In order to find a suitable monthly dividend stock for this article however, I had to lower my criteria to ignore companies with fluctuating dividends and focus on the ones paying stable distributions.

Realty Income Corporation (O) is The Monthly Dividend Company, which operates as an equity real estate investment trust (REIT). The Company’s primary business objective is to generate dependable monthly cash distributions from a consistent and predictable level of funds from operations (FFO) per share. Yield: 4.80% ( analysis )

Gas Natural Inc. (EGAS), is a natural gas utility with operations in Montana, Wyoming, North Carolina and Maine. The Company operates in four business segments: natural gas operations, marketing and production operations, pipeline operations, and corporate and other. Yield: 4.80%

Shaw Communications Inc. (SJR) is a diversified Canadian communications company. Shaw is engaged in the business of providing broadband cable television, Internet, Digital Phone, telecommunications services (through Shaw Business Solutions), satellite direct-to-home services (through Shaw Direct) and engaging programming content (through Shaw Media). Yield: 4.90%

Main Street Capital Corporation (MAIN) is a principal investment firm primarily focused on providing customized debt and equity financing to lower middle market (LMM) companies with annual revenues between $10 million and $100 million that operate in diverse industries. The Company invests primarily in secured debt instruments, equity investments, warrants and other securities of LMM companies based in the United States. Yield: 7.40%

Gladstone Commercial Corporation (GOOD) is a real estate investment trust (REIT). The Company invests in and owns net leased industrial and commercial real estate property and makes long-term industrial and commercial mortgage loans. Most of the properties that the Company owns are leased to tenants, including small businesses and public companies. Yield: 8.30%

Other than that, if we exclude funds, we are mostly left out with royalty trusts paying fluctuating distributions:

Enerplus Corporation (ERF) operates as an independent oil and gas producer. The company's property interests are located in western Canada in the provinces of Alberta, British Columbia, Saskatchewan, and Manitoba, as well as in Montana, North Dakota, Pennsylvania, Maryland, and Delaware in the United States. Yield: 9.10%

Pengrowth Energy Corporation (PGH) engages in the acquisition, exploration, development, and production of oil and natural gas reserves in the Western Canadian Sedimentary Basin. It primarily explores for crude oil, natural gas, and natural gas liquids in the provinces of Alberta, British Columbia, Saskatchewan, and Nova Scotia. Yield: 8.20%

Penn West Petroleum Ltd. (PWE) engages in acquiring, exploring, developing, exploiting, and holding interests in petroleum and natural gas properties and related assets in North America. The company produces light and medium crude oil, natural gas liquids, heavy oil, and natural gas. Yield: 4.90%

Provident Energy Ltd. (PVX) engages in the natural gas liquids (NGLs) infrastructure and marketing business in Canada and the United States. The company involves in the extraction, processing, storage, transportation, and marketing of NGLs, as well as offers these services to third party customers. Yield: 4.80%

While it feels great to receive a dividend from one stock every month, investors should not confuse feeling good with making a good investment. With the exception of Realty Income (O), and (EGAS), most other stocks are not suited for a retirement portfolio. It is much easier to generate monthly income, by stacking quality dividend paying stocks with different payout dates. This way one does not compromise investment quality for the benefits of questionable monthly dividend payers.

Full Disclosure: Long O

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