Stocks that pay high dividends are great, but sometimes you just don't want to wait three months until the next payment. Fortunately, there are some stocks that pay monthly, including these three REITs which all have generous yields and strong upside potential. Here's why Realty Income (NYSE:O), EPR Properties (NYSE:EPR), and LTC Properties (NYSE:LTC) could add a steady, growing stream of monthly dividends to your portfolio, and deliver market-beating performance for decades to come.

EPR Total Return Price Chart

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The monthly dividend company

Realty Income invests primarily in freestanding retail properties. Specifically, the company focuses on three types of retail -- service-oriented, non-discretionary, and businesses with deeply discounted products. The idea is that these businesses are relatively immune to online competition and adverse economic conditions.

The company currently has over 4,600 properties in 49 states and Puerto Rico, diversified across 47 different industries. Realty Income has a solid balance sheet and an investment-grade credit rating (Baa1/BBB+), allowing it easy access to funding for attractive acquisition opportunities.

To further add to the stability, Realty Income's tenants sign long-term (15- to 20-year) "net" leases, typically with annual rent increases built in. Under the terms of a net lease, the tenants are responsible for taxes, insurance, and maintenance on the buildings -- Realty Income simply collects a monthly rent check. This business model has maintained an occupancy rate that has never dipped below 96% in Realty Income's 22-year history as a public company.

As far as dividends go, Realty Income pays just over 4% per year in monthly installments (in fact, Realty Income is known as "the monthly dividend company"), and it has increased its payout for 74 consecutive quarters by an average rate of 4.7% per year. Even more impressively, the stock has produced an S&P 500-crushing 17.8% total return since its 1994 IPO.

A unique mix of property types

EPR Properties is a unique REIT in that it invests in three specific, but different, types of properties -- entertainment, recreation, and education. The company has been around since 1997 and has grown into a collection of more than 270 properties spread throughout 39 states, D.C., and Canada. Specific property types include:

  • Entertainment (53% of portfolio): megaplex theaters, retail entertainment centers, family entertainment centers
  • Recreation (21%): metro ski parks, water parks, golf entertainment complexes
  • Education (22%): public charter schools, private education, early childhood education

(Note: Percentages don't add to 100%, because a small portion of EPR's properties don't fit into one of these categories.)

The company has an outstanding 98.8% occupancy rate and excellent tenant retention (after all, how often does a water park just pack up and move?). Although entertainment and recreational properties are certainly more recession-prone than Realty Income's portfolio, there are some good reasons to believe EPR's property types have a bright future.

The entertainment properties (mostly megaplex theaters) are benefiting from strong box-office revenue and increased customer spending due to continuously expanded amenities. Millennials, the largest moviegoing segment of the population, want more luxurious seating and more food and beverage options, and are willing to pay for it. The recreation properties are seeing strong attendance growth and higher spending. And demand for public charter schools has grown by an 11% annual rate since 2000, with more than 1 million students on waiting lists.

Check out this article for a more in-depth look at EPR. The company has produced an average annual return of 16.2% throughout its 19-year history, and pays a generous 5.4% dividend yield.

Healthcare has strong demographic and financial trends

I've written before about how healthcare real estate is an excellent long-term opportunity, because of the strong industry trends and low valuations in the sector. The senior citizen population is expected to grow rapidly in the coming decades, which will create a growing demand for healthcare properties. In fact, the 75-and-over population is expected to increase from about 6% of the U.S. population to 10% by 2030. Plus, healthcare costs are increasing at a higher rate than overall inflation, which will increase these properties' ability to generate revenue.

Image source: LTC Properties, using data from the U.S. Census Bureau. 

One way to get in on this opportunity while collecting monthly dividends is with LTC Properties, which, as the name implies, focuses on long-term care properties such as senior housing and assisted living. LTC is actually one of the smaller healthcare REITs, with a total of 213 properties in 30 states, and partners with some of the more well-known facilities operators in the business such as Prestige Healthcare and Brookdale Senior Living. Just 25.2% of the total enterprise value is debt, the lowest among the three companies discussed here.

LTC Properties pays a 4.7% dividend yield, and has increased its payout by an average of 4.8% per year throughout the last decade. And, with the industry trends I mentioned, there's no reason to believe this won't continue.

The benefits of monthly dividends

Aside from the obvious benefit of a more frequent income stream, there is another reason monthly dividend stocks are a good idea, especially if you reinvest dividends. Mathematically, the more frequently a dividend is compounded, the higher the overall return.

For example, let's say that you have the choice between three different investments. All three pay a 7% dividend, but one pays annually, another pays quarterly, and the third pays monthly. The annual payment is straightforward, but the quarterly and monthly payments get interesting. Specifically, each subsequent dividend payment is paid on the original principal plus the reinvested amounts from previous dividends.

So the quarterly dividend payments actually produce an effective annual yield of 7.19%. And the monthly payments produce an even better effective yield of 7.23%. These may sound like small differences, but they can make a big difference over long time periods.