Cheap Stocks That Pay Monthly Dividends
Over the past several years, in a period of artificially low interest rates, dividend stocks have played a crucial role in boosting the yields of income investors’ portfolios. While there are still plenty of high-dividend stocks on the market, most of them make dividend payments on a quarterly basis.
For investors who rely on their portfolios to generate an income stream, four dividend payments a year might not be enough. Fortunately, there are stocks that distribute on a monthly basis. In this article, we are going to take a look at some relatively cheap stocks that pay monthly dividends.
When it comes to finding cheap dividend-paying stocks, the first thing you should know is that it’s not about finding stocks that trade at penny stock levels. Rather, it’s about finding stocks that have low valuations. Sometimes a stock can look extremely cheap but, because the company is not profitable, it may actually be trading at expensive valuations.
Moreover, when looking for low-priced dividend stocks, investors should look beyond the dividend yield. A stock may look dirt cheap and provide a high yield but, quite often, it is cheap only because investors don’t believe the payout is sustainable. Buying a cheap stock before its dividend is cut can result in a very expensive experience.
Cheap Stocks to Watch
Monthly dividend stocks are typically found in two sectors: real estate investment trusts (REITs) and business development companies (BDCs).
To qualify as a REIT, a company must have at least 75% of its assets invested in real estate, cash, or U.S. Treasuries. Moreover, at least 75% of its gross income must come from rental fees, interest from mortgages, or other real estate investments. The best part is that REITs are legally required to distribute at least 90% of their taxable income to shareholders each year as dividends. That’s why they have been a staple in many income investors’ portfolios for decades. And, because some REITs are giant landlords with predictable cash flows, they have the ability to make dividend payments on a monthly basis.
Business development companies invest in small- and medium-sized businesses to help them grow in the initial stages of their investments. Normally, it’s difficult for retail investors to invest directly into startup companies. But by investing in a BDC, which is publicly traded just like a regular stock, smaller investors can tap into a market usually dominated by venture capital funds. And, just like REITs, BDCs are required by law to distribute at least 90% of their earnings to investors.
Finding cheap dividend stocks that pay monthly dividends is not really an easy task. This is in part because most dividend stocks distribute quarterly, and investors are willing to pay a premium for companies that distribute on a monthly basis. For instance, one of my favorite monthly dividend stocks, Realty Income Corp (NYSE:O), is now trading at over 50 times its earnings.
Realty Income brands itself as “The Monthly Dividend Company,” and, to be honest, no one deserves the title more. The company has made 558 consecutive monthly dividend payments and has been raising its payout every quarter for 77 consecutive quarters. Since Realty Income’s listing on the New York Stock Exchange in 1994, its annual dividends have been growing at a compound annual growth rate (CAGR) of 4.7%. (Source: “Dividend Amount and Track Record,” Realty Income Corp, last accessed January 24, 2017.)
With over 4,700 properties under long-term net least agreements, 247 commercial tenants from 47 different industries, and an unbeatable track record in returning value to investors, Realty Income looks like the perfect pick for monthly dividend stock. But because of that, investors are willing to pay $54.66 for each dollar of its earnings. That’s a hefty premium given that the industry’s average price-to-earnings (P/E) ratio is at around 32 times. Moreover, Realty Income’s price-to-sales, price-to-book, and price-to-cash-flow ratios are all higher than the industry’s averages. (Source: “Realty Income Corp (O.N),” Reuters, last accessed January 24, 2017.)
That’s why even though Realty Income is a solid pick, it doesn’t fit into the cheap monthly dividend stocks list. And since we don’t want stocks that are cheap because their dividends are not sustainable, we need to find a balance between value and prospects. Below, I have compiled a list of five relatively cheap monthly dividend stocks.
Cheap Stocks List
| Company Name | Ticker Symbol | Dividend Yield | Price-to-Earnings Multiple |
| Gladstone Investment Corporation | GAIN | 8.56% | 6.49 |
| Main Street Capital Corporation | MAIN | 6.10% | 19.11 |
| Prospect Capital Corporation | PSEC | 11.52% | 19.78 |
| LTC Properties Inc | LTC | 4.78% | 22.11 |
| EPR Properties Real Estate Trust | EPR | 5.47% | 23.84 |
If you are familiar with REIT investing, you would know that there are generally two types of REITs: high-diversified ones like Realty Income Corp, and highly specialized ones. Each type has its own advantages. If you want to capture the benefit of both types, then you should take a look at EPR Properties Real Estate Trust (NYSE:EPR).
5. EPR Properties Real Estate Trust (NYSE:EPR)
The best way to describe EPR Properties is that it is a specialized REIT that diversifies across and within segments. The company invests in three primary segments: entertainment, recreation, and education. Its current portfolio of over $5.0 billion is invested in over 290 locations spread across 41 states, with over 250 tenants. (Source: “Corporate Overview,” EPR Properties Real Estate Trust, last accessed January 24, 2017.)
EPR Properties pays monthly dividends. It currently has a monthly dividend rate of $0.34 per share, translating to a handsome annual yield of 5.47%. The company has also been raising its payout. Since 2010, EPR Properties’ annual dividend payout has been growing at an average rate of approximately seven percent. (Source: “Dividends,” EPR Properties Real Estate Trust, last accessed January 24, 2017.)
The most impressive part about EPR Properties is its ability to deliver total shareholder return, which includes stock price appreciation, dividends, and buybacks. Over the past 10 years, EPR Properties delivered 212.19% of total return to shareholders, beating both the Russell 200 (99.93%) and the MSCI U.S. REIT Index (83.02%). (Source: “Total Return To Shareholders,” EPR Properties Real Estate Trust, last accessed January 24, 2017.)
Trading at $74.62 apiece, EPR Properties has a P/E multiple of 23.84 times, which is considerably less than the industry’s average P/E of 32 times.
4. LTC Properties Inc (NYSE:LTC)
LTC Properties Inc (NYSE:LTC) is a real estate investment trust headquartered in Westlake Village, California. The company specializes in seniors housing and healthcare properties. Its portfolio features over 200 range-of-care, assisted living, post-acute/skilled nursing and memory care properties located in 30 states. The company also has 35 operating partners. (Source: “Our Portfolio,” LTC Properties Inc, last accessed January 24, 2017.)
LTC Properties is a monthly dividend stock. The company has a monthly dividend rate of $0.19 per share, translating to an annual dividend yield of 4.78%. It also has a price-to-earnings multiple of 22.16 times, less than half of the 48.97 times industry average.
LTC stock could be a great income investment due to the nature of its business. There are many types of REITs on the market, but healthcare REITs might be the most resilient. This is because the demand for healthcare is relatively inelastic to how the overall economy is doing, which means healthcare REITs can continue to prosper regardless of where we are in the economic cycle. A look at LTC stock’s dividend history proves the point. Since the company switched to paying monthly dividends in 2005, its per-share payout has increased by 73%. (Source: “Dividends,” LTC Properties Inc, last accessed January 24, 2017.)
Don’t forget that the company could also benefit from an ongoing demographic trend. According to the Population Reference Bureau, the number of Americans aged 65 and older is expected to more than double from 46 million in 2015 to over 98 million by 2060. In the next decade alone, the number of senior citizen in the U.S. is projected to increase by 18 million. As more baby boomers enter their golden years, LTC Properties is set to keep generating handsome returns. (Source: “Aging in The United States,” Population Reference Bureau, last accessed January 24, 2017.)
3. Prospect Capital Corporation (NASDAQ:PSEC)
Prospect Capital Corporation (NASDAQ:PSEC) is a business development company that provides private debt and equity to middle-market companies in the U.S. The company has a focus on transactions backed by sponsors and lending directly to established companies that are owner-operated.
The number-one reason for income investors to consider Prospect Capital is its dividends. PSEC is a high-dividend stock, currently yielding 11.52%. Moreover, its dividends are paid to shareholders on a monthly basis.
Prospect Capital is one of the largest BDCs on the market, with $7.1 billion in capital under management. The majority of the company’s investments are in first-lien and second-lien senior loans and mezzanine debt. By the end of the third quarter of 2016, first-lien and second-lien secured loans made up 71% of the company’s portfolio. (Source: “Prospect Capital Corporation,” Prospect Capital Corporation, last accessed January 24, 2017.)
One thing many companies are concerned with today is the rising interest rate environment. However, in the case of Prospect Capital, higher rates might actually be a catalyst. This is because the company invests mostly in floating rate assets while borrowing at fixed rates.
Prospect Capital has a P/E multiple of 19.78 times. It currently trades at approximately a 13% discount to its net asset value.
2. Main Street Capital Corporation
Main Street Capital Corporation (NYSE:MAIN) is a business development company that provides capital to private companies in the United States. It has approximately $3.5 billion in capital under management, $2.4 billion of which are managed internally, while the remaining $1.1 billion are managed as a sub-advisor to a third party. (Source: “Business Description,” Main Street Capital Corporation, last accessed January 24, 2017.)
The company has a focus on lower-middle-market companies, which it believes are underserved right now. Lower-middle-market companies generally have revenue between $10.0 million and $150.0 million, and earnings before interest, taxes, depreciation, and amortization (EBITDA) between $3.0 million and $20.0 million.
Main Street Capital has a diversified portfolio, having invested in companies in consumer discretionary, energy, financials, health care, industrials, materials, telecommunications, and transportation industries.
Completing its initial public offering (IPO) in 2007, Main Street Capital started with quarterly dividends. But in September of 2008, it decided to start paying dividends every month.
2008 wasn’t exactly a good time in the economic cycle. Many companies saw their businesses decline, while some slashed their dividends. Not at Main Street Capital, though; the company not only didn’t cut its payout, but it has actually been raising its dividend. Since Main Street Capital’s IPO, the company’s monthly dividend rate has increased by 68%. (Source: “Dividends,” Main Street Capital Corporation, last accessed January 24, 2017.)
Paying $0.185 per share on a monthly basis, MAIN stock has an impressive annual dividend yield of 6.1%. The company also has attractive valuations. Trading at $36.37 apiece, it has a P/E multiple of just over 19 times.
1. Gladstone Investment Corporation
Gladstone Investment Corporation (NASDAQ:GAIN) is a business development company that makes debt and equity investments in established private businesses in the United States. The company pays monthly dividends with a quite attractive annual yield of 8.56%. Moreover, it has a very reasonable valuation of 6.49 times.
Gladstone’s investments typically range from $5.0 million to $30.0 million. On the debt investment side, the company invests primarily through senior term loans, senior subordinated loans, and junior subordinated debt. Gladstone’s equity investments primarily take the form of preferred or common equity often associated with buyouts and other recapitalizations. The company’s target asset allocation is 75% debt securities and 25% equity securities. (Source: “Quarterly Overview,” Gladstone Investment Corporation, September 30, 2016.)
As of September 30, 2016, the company has invested in 36 companies across 19 states and 17 industries.
Gladstone has been growing its portfolio. From its fiscal 2012 to fiscal 2016, the fair value of the company’s total investments have increased at an annual growth rate of 17%. This allows its interest income to increase at an annual growth rate of 19%. Over this period, Gladstone delivered 29% of cumulative regular distribution growth.