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2 Stocks That Cut You a Check Each Month

By Brent Nyitray, CFA - Jan 20, 2021 at 7:09AM

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Income is still out there, although it can be harder to find.

Income investors are looking at a difficult landscape, given that interest rates are stuck at all-time lows. That doesn't mean there are zero investments that pay a decent yield, but they are rarer and harder to find.

But if you're looking for a couple of solid dividend stocks, this might be what you wanted to see. Here are two stocks with a decent yield, and the benefit of paying a monthly dividend. Sound interesting? Read on. 

Picture of a calculator, money and dividends

Image source: Getty Images.

Defensive tenants help this retail REIT

Realty Income (O -1.13%) is one of the Dividend Aristocrats, an elite group of companies that have raised their dividend every year for at least 25 years. Realty Income was one of the first monthly dividend companies; hence its trademarked moniker The Monthly Dividend Company.

Realty Income owns stand-alone retail properties and rents them to tenants that have defensive characteristics. While the typical mall real estate investment trust (REIT) like Simon Property Group or The Macerich Company might rent to retailers who specialize in largely discretionary goods like apparel, Realty Income's tenants focus on nondiscretionary goods. Its biggest tenant is Walgreens, followed by 7-Eleven, Dollar General, and FedEx. 

The REIT focuses on tenants with reliable and sustainable cash flows, multiple sources of income, and the willingness to sign long-term leases (around 10 years). These types of tenants are most likely to be able to make rent payments throughout the economic cycle. As of Sept. 30, 98.5% of Realty Income's properties were occupied, and the company had collected 93.1% of contractual rent.

While most of its tenant base was able to stay open during the pandemic, some like movie theaters and fitness clubs were not. Realty Income recently declared a monthly dividend of $0.2345 per share, which works out to an annualized dividend yield of 4.8%. Its trailing-12-month adjusted funds from operations (AFFO) are $3.41 per share. which gives the company a multiple of 17.2 times AFFO per share.

The mortgage REIT with a powerful ally

AGNC Investment (AGNC 2.04%) is a different kind of REIT than Realty Income. While most follow a model similar to Realty Income's, where the company buys and rents out properties, AGNC Investment is a mortgage REIT. These companies don't buy real estate; they buy real estate debt.

AGNC Investment is an agency mortgage REIT, which means it concentrates on residential mortgages that are guaranteed by the U.S. government. If you recently refinanced your home, chances are your lender sold your loan to a company like AGNC. 

The early part of the year was difficult for the mortgage REIT space as volatility in interest rates caused the mortgage-backed securities market to become illiquid for a month. This caused asset values to decline, and forced the entire mortgage REIT space to cut dividends and sell assets. AGNC was one of the better-insulated REITs. That said, it did cut its dividend by 25% in April of 2020, although the company said in retrospect it was probably not necessary. 

AGNC has the most powerful ally in the investing universe: the Federal Reserve. The Fed has been buying agency-mortgage backed securities in order to support the economy. By doing so, the Fed is also helping AGNC. The REIT invests in mortgage-backed securities with certain characteristics that make them more valuable than garden-variety agency-mortgage backed securities, which means that they are priced slightly higher. These securities generally do move up and down in tandem with the wider mortgage-backed securities market, so the Fed is a useful ally.

AGNC pays a monthly dividend of $0.12 per share, which works out to an eye-popping yield of 9.2% per share. Given that it used to pay a monthly dividend of $0.16 per share prior to COVID and the company's comments about the dividend cut being unnecessary, a dividend hike could be in the cards.

Realty Income and AGNC Investments may not have the sizzle of Tesla, but they do provide steady monthly income, and that stability can be the backbone of an income investor's portfolio. 

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Stocks Mentioned

AGNC Investment Corp. Stock Quote
AGNC Investment Corp.
$12.00 (2.04%) $0.24
Realty Income Corporation Stock Quote
Realty Income Corporation
$67.22 (-1.13%) $0.77
Simon Property Group, Inc. Stock Quote
Simon Property Group, Inc.
$107.77 (-0.98%) $-1.07
The Macerich Company Stock Quote
The Macerich Company
$11.56 (0.79%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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