Although dividend stocks can pay shareholders at any time, most companies opt to distribute cash on a quarterly basis. However, a few choose to allocate a cash distribution to shareholders each month. These higher-frequency payments create built-in appeal among some investors, particularly those who depend on dividends for income.
Now, investors may have another reason to look at this type of dividend stock. The COVID-19 crisis means many of these stocks trade at a massive discount from where they sold as little as two months ago. As a result, not only can these prospective stockholders collect frequent payouts, but they can also buy these stocks on sale. Additionally, many offer dividend yields well above the S&P 500 average of about 2.1%. Stocks such as LTC Properties (NYSE:LTC), Main Street Capital (NYSE:MAIN), and Pembina Pipeline (NYSE:PBA) offer investors such an opportunity.
The market does not offer a guarantee of success, but one could argue that LTC Properties comes very close. This healthcare REIT benefits from a baby boomer population of 73 million entering the Medicare system over the next few years. Due to the size of this population, about 10,000 baby boomers age into Medicare every day. This increases the demand for the more than 180 LTC facilities that provide housing and skilled nursing services to the Medicare population.
As a result, analysts project earnings growth of 4% per year over the next five years. At current prices, investors will pay around 17.6 times current earnings. That may appear a bit elevated, considering the growth rate. Still, their growing customer base of baby boomers receiving Medicare is a known quantity. Hence, investors have driven the cost of the stock higher.
However, this coronavirus-related sell-off presents an opportunity. LTC stock traded above $50 per share as recently as February. Now, it trades in the mid-$30s per share range, levels not seen since 2018.
LTC pays its shareholders a monthly dividend of $0.19 per share. This brings the yield to about 6.7%. At first glance, a payout ratio of around 113.3% may spark concerns about sustainability. However, for REITs, funds from operations (FFO) income, or net income with the depreciation expense added back, determines dividend affordability. FFO income came in at $3.08 per share in 2019, indicating that the company can easily afford its payout.
The dividend has remained at its current levels since 2016. Still, it has tended to grow over time since the company switched to monthly dividends in 2005. With a long track record of steady payouts and a discounted stock price, investors appear to have a unique opportunity in LTC stock.
Main Street Capital
Main Street Capital invests in what it calls "lower middle market solutions." This means they provide financing to small and medium-sized companies looking for funds for purposes such as acquisitions or refinancing. They also offer solutions for companies looking to transition to new ownership.
Main Street typically works with companies that bring in between $10 million and $150 million in annual revenue. Moreover, the company earns money from more than just loan revenue; it also gains an ownership stake in the company. This provides the company additional revenue streams from both dividends and company sales.
At first glance, Main Street appears to offer a compelling value proposition. It trades at a current price-to-earnings (P/E) ratio of about 12.7. That seems like a reasonable multiple when one factors in the average predicted earnings growth of around 7% per year over the next five years.
The company pays $0.205 per share in monthly dividends. This gives the company a yield of about 9.8%. Admittedly, the payout ratio of around 115% may appear worrisome. The payout has also risen for nine consecutive years, and it remains unclear how the market would react to a cut in the dividend.
However, with its yield, a cut would probably still leave investors with a generous return. Moreover, amid coronavirus-related selling, the stock trades at a discount to recent levels. Main Street traded at $45.10 per share as recently as February. It sells around $25 per share at the time of this writing. This brings Main Street stock back to levels not seen since 2012.
Indeed, the risk of non-payments on loans increases in harder times. However, given the massive drop in the stock, investors have likely factored this possibility into the share price. Additionally, with investments across multiple industries, Main Street has positioned itself to weather such storms.
In an environment of rock-bottom oil prices, Pembina Pipeline may seem like an odd choice. At oil prices below $20 per barrel, most North American producers have or are trying to cut production. The coronavirus crisis has also reduced consumption as both consumers and businesses have less need to travel.
However, producers have responded quickly to the falling prices. Russia and Saudi Arabia have agreed to end the price war that helped to take down the price of oil. Saudi Arabia has even cut production ahead of the agreement.
Moreover, the COVID-19 crisis will not last forever. Once activity resumes across the world, consumption should again come close to levels seen before the quarantines.
Also, the company continues to maintain dividend stability. The Calgary-based pipeline company pays a monthly dividend to 21 Canadian cents ($0.15) per share. This takes the yield to around 8.25%.
At current prices, the yield has reached a multi-year high. However, the company maintains that it pays dividends at its discretion, and shareholders cannot rule out the possibility of a dividend cut. After all, the payout ratio has reached almost 115%, meaning the dividend exceeds company profit levels for now.
However, investors should note that in the oil price slump from 2014 to 2016, Pembina continued to increase its payout. Moreover, at just over $20 per share, investors can buy Pembina stock at around half the $40.65 per share high, where it traded in February. Furthermore, the last time the stock traded this low was in 2015, at the height of the previous oil price slump. Hence, even if the company slashes the dividend, investors could profit from a recovery in the stock price.