Written by Bob Ciura for Sure Dividend
Monthly dividend stocks are a reliable way for investors to generate regular passive income due to their consistent stream of cash flow. They offer more frequent payments than quarterly or annual dividends and can be used to supplement other sources of income or cover living expenses.
These stocks are also advantageous for compounding returns as investors can reinvest dividends to grow their wealth. This article will discuss three safe monthly dividend stocks with strong yields and sustainable payouts.
#1. STAG Industrial, Inc. (STAG)
STAG Industrial is a Real Estate Investment Trust (i.e., a “REIT”) that owns and operates industrial real estate across 40 states in the U.S., focusing on single-tenant properties. Despite the higher risk associated with single-tenant properties, STAG Industrial analyzes its tenants deeply and has had credit losses of less than 0.1% since its IPO. Over half of its tenants are publicly rated, and almost 60% generate over $1 billion in revenue. STAG Industrial also boasts a well-diversified portfolio. For example, its largest tenant, Amazon, contributes just 3.0% of its overall annual rent revenue, with the next largest tenant generating only 0.9%.
STAG Industrial has achieved an average annual growth rate of 4.9% in FFO per share over the past decade, with a 5.4% average annual growth rate over the past five years. With a market share of less than 1% in its target market, which is worth over $1 trillion, STAG’s growth should remain robust for many years to come. Moving forward, we expect it to achieve a 5% FFO per share CAGR over the next half-decade.
STAG Industrial also has a strong balance sheet, with an investment-grade credit rating. Moreover, it has a well-laddered lease maturity schedule with a weighted average lease term of 4.9 years, providing reliable cash flows under normal business conditions.
The dividend looks highly sustainable moving forward when you combine the strong balance sheet, stable cash flow profile, strong growth momentum, and a conservative payout ratio that is expected to come in at ~65% this year.
Moving forward, we expect STAG stock to deliver strong total returns from a combination of a 5% annualized FFO per share CAGR over the next half-decade, its 4.3% current dividend yield, and 0.9% expected annualized valuation multiple expansion. As a result, we expect STAG to deliver 10.2% annualized total returns moving forward.
#2. Phillips Edison & Company, Inc. (PECO)
Phillips Edison & Company is also a REIT that owns and operates grocery-anchored neighborhood shopping centers. Despite the decline of shopping centers at the hands of growth in online shopping, Phillips Edison is protected because it generates most of its rental income from necessity-based retailers and has minimal exposure to distressed retailers. Moreover, management owns 7% of the company’s stock, aligning their interests with shareholders.
We think PECO’s dividend is safe due to its defensive business model, low ~50% payout ratio, and solid balance sheet. The company has an investment grade (BBB-) credit rating from S&P and a Baa3 rating from Moody’s, well-laddered debt maturities, and 85% of its total debt has a fixed interest rate.
Moving forward, PECO plans to continue growing through accretive acquisitions, high retention rates, increasing occupancy, higher re-leasing spreads, executing redevelopment projects, and implementing rent hikes in new leases. Despite a decline of 4.1% in same-store NOI during the pandemic in 2020, same-store NOI rose by 8.2% in 2021 and 4.5% in 2022. We expect PECO to achieve an FFO/share CAGR of 3% through 2028.
Taking all of this into account, we expect PECO to deliver a total return CAGR of 5.4% over the next half-decade due to its 3.6% dividend yield, expected 1.2% annualized headwind from multiple compression, and 3% annualized FFO per share growth rate. As a result, while it is likely to be a reliable source of monthly income, it is unlikely to deliver exceptional total returns for the foreseeable future.
#3. Realty Income Corporation (O)
Realty Income is also a REIT and owns a vast portfolio of over 11,000 standalone properties. O has a long history of dividend growth and has increased its dividend over 120 times since its IPO in 1994, earning it a sterling reputation and helping it to deliver exceptional total returns for shareholders over the years.
The company’s balance sheet is one of the strongest in the triple net lease sector, earning it an A- credit rating and access to attractively priced capital.
We think O’s dividend is safe because its triple net lease business model has proven to be very defensive and generate stable cash flows through all kinds of economic environments. Moreover, its balance sheet strength positions it to weather periods of challenges without having to cut the dividend. Last, but not least, its payout ratio of 78% is quite modest for such a strong business, so O should be able to fully cover its dividend for years to come pretty easily.
The company’s competitive advantage lies in its industry-leading scale and credit rating, which give it economies of scale and cost of capital advantages. It also enables it to make large-scale deals such as its recent acquisition of VEREIT.
Realty Income’s growth is steady, coming almost every year at a mid-single-digits per-share rate, with a focus on growing rents at existing locations and acquiring new properties. The REIT has been able to grow its AFFO per share and dividend per share for 25+ years, making it a Dividend Aristocrat. Its properties are relatively Amazon-proof and recession-proof, as the REIT owns standalone properties that can be used for various purposes, and the occupancy rate across the portfolio is around 99%, including through economic downturns.
When you combine its 4.0% expected AFFO per share CAGR with its current 4.9% dividend yield and expected annualized valuation multiple expansion of 2.3%, we project that O stock will generate 11.2% annualized total returns over the next half-decade. As a result, we view it as a Buy that can deliver an attractive combination of reliable and growing monthly income and double-digit annualized total returns.
Monthly dividend stocks can be great sources of regular income. With STAG, PECO, and O investors can access attractive sources of reliable monthly income. Moreover, STAG and O appear poised to deliver double-digit annualized total returns over the next half decade and potentially beyond.