Written by Bob Ciura for Sure Dividend
Most companies distribute dividends on a quarterly schedule. For investor relying on dividends for monthly income, this can present challenges when attempting to construct a portfolio that generates similar income throughout the year.
There are, however, stocks that make monthly dividend payments, which can help smooth out cash flows and provide the investor with more assurance that their income needs will be met.
There are less than 50 monthly dividend stocks, so the choices are somewhat limited. The good news is that many of these names offer very high yields, which compare favorably to the average yield of 1.6% for the S&P 500 Index.
Three of our favorite high yield monthly dividend paying stocks include:
- Main Street Capital Corporation (MAIN)
- SL Green Realty Corp (SLG)
- STAG Industrial (STAG)
Main Street Capital
First up is Main Street Capital, a leading business development company, or BDC. The company has a market capitalization of nearly $3 billion and has produced revenue of more than $300 million over the last year.
Main Street Capital primarily provides debt and equity capital to companies in the lower middle market, which are those with annual revenue in the $10 million to $150 million range. The company’s funding is used in different ways, such as for acquisitions, buyouts, growth financings, and recapitalizations. Main Street Capital also invests in middle market companies, which are those with up to $1 billion in annual revenue. In addition, the company also has a growing asset management advisory segment.
Main Street Capital has a fairly diversified investment portfolio. At the end of the first quarter of 2022, the company had an investment portfolio of $3.7 billion spread across more than 200 companies. Debt investments accounted for slightly more than two-thirds of the portfolio, with equity investments representing the remainder. At the end of the quarter, Main Street Capital had $1.8 billion invested in 75 lower middle market companies, $1.3 billion of private loans invested in 79 companies, and $397 million invested in 36 middle market companies.
The company places an emphasis on the lower middle market as this is often an underserved space even though it is a large and critical portion of the U.S. economy. There are more than 195,000 domestic companies that qualify as lower middle market, but often don’t have the opportunities to receive investment because of their size.
Main Street Capital acts as a single source of investment so clients don’t have to seek out additional sources of capital. Nearly all of the $2.6 billion of debt investments that the company has are first lien debts, offering some protection in case the borrower fails to repay their obligations.
Main Street Capital ability to use debt and equity to fund investments separates it from other companies that use one or the other as a means to invest. These allows them to reach a wide variety of potential clients.
BDCs typically offer high dividend yields as they are required by law to distribute at least 90% of taxable income in the form of dividends to shareholders. Main Street Capital is no different. The company currently offers a monthly dividend of $0.215 per share, which amounts to an annualized dividend of $2.58. At the current price, shares yield 6.6%.
Main Street Capital also pays periodic special dividends, thanks to the additional income generated from the company’s equity portfolio. For example, the company has or is schedule to distribute two special dividends of $0.075 already this year.
The company has a projected dividend payout ratio of 94% for 2022. This is extremely high, but compares favorably to the average payout ratio of 113% since 2012. Only two times in the last decade (2012 and 2021) has the payout ratio been below 100%.
SL Green Realty
The next name for consideration is SL Green Realty, a self-managed real estate investment trust, or REIT, that focuses the entirety of its business in the New York City Metropolitan area. The trust is valued at $4.2 billion and generated revenue of $806 million over the last year.
SL Green Realty is the largest owner of office retail estate in New York City. With 72 buildings and 35 million square feet, SL Green Realty is the largest office landlord in Manhattan. The trust does lack some diversification as it is focused in one area, but does benefit from operating in one of the most attractive commercial markets in the world.
The area that the trust operates has long been the financial hub of the world, making SL Green Realty’s properties attractive to clients. But the area is quickly become home to the technology sector as well, as New York City is one of the largest employers in the sector. This could provide some diversification away from just the financial sector in the future.
SL Green Realty has signed leases that involved nearly 29 million square feet of office space over the last decade, but is not resting on past success. The trust has 3.8 million square feet of space under development as of the most recent quarter. The trust also tends to sign long-term leases with tenants, usually for periods of 7 to 15 years, helping to lock in extended cash flows.
SL Green Realty did struggle during the worst of the Covid-19 pandemic due to the change to work-at-home environment that was forced to take place to slow the spread of the virus. Manhattan office space occupancy was reported at less than 15% at one time in 2020.
That said, same-store occupancy rate for the Manhattan portion of the portfolio was nearing 93% as of early May and appears to be rising as demand for SL Green Realty’s properties has returned. This speaks to the level of demand for the trust’s strategically located buildings.
According to the NY State Department of Labor, 84% of office positions lost in the first half of 2020 due to the pandemic have been recovered. SL Green Realty’s occupancy rate will likely continue to increase as more of these positions are filled.
SL Green Realty has only recently transitioned to distributing monthly dividends, beginning in the spring of 2020. While the business suffered during that year, SL Green Realty continued to pay its monthly dividend. The trust then raised its dividend for the first payment for both 2021 and 2022. The monthly dividend rate of $0.3108 translates to an annualized dividend of $3.73 for the year. Shares yield 5.7% at the moment.
SL Green Realty has a projected payout ratio of 57% for 2022, a ratio that is lower than the typical REIT. This is above the 10-year average payout ratio of 41%, but likely not in a dangerous area. The trust was able to grow its dividend in what was a terrible environment for office REITs in 2020, but maintained a payout ratio of just 50%. We view the dividend as safe as a result.
Investors should note that SL Green Realty has paid substantial special dividends at the start of each of the last two years. Factoring the special dividend of $2.44 received from the beginning of 2022, investors are projected to see dividends of $6.17 this year, resulting in a yield of 9.4% based on current prices.
Our final monthly dividend pick is STAG Industrial, a REIT focused on owning and operating industrial real estate properties. The trust has a market capitalization of $6.2 billion and had revenue of $587 million over the last 12 months.
STAG Industrial is the only pure-play industrial REIT in the market. The trust’s portfolio consists of single-tenant industrial properties. Single-tenant properties are among the riskiest to own as the building is either occupied or its not.
To counteract this risk, STAG Industrial operates a very diversified business model as it owns and operates nearly 550 buildings in 40 U.S. states.
This theme of diversification is a hallmark of the trust that is seen almost everywhere in its business. STAG Industrial’s portfolio includes exposure to more than 45 industries. The largest market accounts for less than 8% of annual base rents, with the largest tenant, Amazon Inc. (AMZN), contributing just 3.2% of annual base rents. Top 20 largest tenants are responsible for less than 20% of total rent. Even tenant revenue exposure by annual base rent is diversified as STAG Industrial’s clients have annual revenue in a range of less than $50 million to more than $100 billion.
STAG Industrial tends to partner with established tenants as these are the companies that have proven track records. As a result, more than half of its tenants are publicly rated with a third receiving an investment grade rating. A total of 83% of tenants have at least $100 million in annual revenue while 59% generate more than a billion. The occupancy rate was 96.9% as of the last quarter.
STAG Industrial has undergone incredibly growth since its IPO in the spring of 2011. Square footage is up nearly eight fold to 110.1 million while the number of properties has increased from 93 to 551.
The trust is taking steps to increase the size of its portfolio. STAG Industrial’s acquisition pipeline totaled almost $8 billion for the 2019 to 2021 period. Though May 1st, 2022, the trust has more than $3.5 billion of transactions already for the current year. STAG Industrial has an estimated total addressable market of $1 trillion that is highly fragmented, giving the trust plenty of growth opportunity in the future.
This hyper focus on diversification and strong business performance has enabled the trust to provide shareholders with a solid dividend track record. STAG Industrial has raised its dividend for more than a decade. The current monthly payment of $0.1217 per share equates to an annualized dividend of $1.46. STAG Industrial yields 4.2%.
We expect the payout ratio to be 66% for 2022 well below the 10-year average payout ratio of 85%. This would also be the lowest payout ratio for the trust in more than a decade.
Evening out dividend payments over the year is difficult when most companies distribute dividends on a quarterly basis. Using monthly dividend paying investments can mean that income needs are better met, providing reassurance that expenses will be met in retirement.
Unfortunately, there are just a handful of stocks that offer monthly dividend payments and not all are created equal in terms of quality.
The good news is that there are several, including Main Street Capital, SL Green Realty, and STAG Industrial, that we believe are high quality companies that have a yield that is at least twice the average yield of the S&P 500 Index. In each case, the dividend also looks secure, another important characterize to always consider when investing.
For those seeking monthly dividend payments, Main Street Capital, SL Green Realty, and STAG Industrial could be excellent additions to the portfolio.