While the stocks that pay dividends generally do so on a quarterly basis, there is a select group of companies that pay them out monthly. These companies are often found in the real estate investment trust (REIT) sector, which also happens to be a good place for income investors to find quality companies with high dividend yields.
Here are two REITs that income investors might appreciate knowing about, that pay monthly dividends, and that have above-market yields.
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1. Realty Income: A highly stable triple net lease company
Realty Income (O -0.02%) is a Dividend Aristocrat that calls itself The Monthly Dividend Company. This REIT, which focuses on triple-net leases, develops single-tenant stand-alone buildings and enters into long-term leases with solid, financially stable tenants.
Tenants are responsible for taxes, maintenance, and insurance, which is why it is called a triple-net lease. This is different than the typical retail lease, commonly known as a gross lease. With gross leases, the tenant pays rent and the landlord takes care of taxes, insurance, and maintenance. Only the most stable and durable tenants (Realty Income refers to them as clients) are suitable candidates for the triple-net-lease model. Just over half of Realty Income's clients are investment grade.
At the end of 2020, the top clients for Realty Income included Walgreen's, FedEx, 7-Eleven, Dollar Tree, and Dollar General. These companies generally have defensive characteristics that make them less sensitive to the economy than many consumer discretionary stocks. At the end of March 2021, Realty Income was collecting 94% of contractual rent, and theaters in its property portfolio were the main problem area. This sector was hit particularly hard by COVID-19 lockdowns and has taken longer to recover. Despite the issues with theaters and other clients, Realty Income hiked its dividend twice in 2020, when many REITs were cutting theirs.
The company trades at just under 20 times its guidance for 2021 adjusted funds from operations (AFFO), which is the relevant earnings metric for most REITs. It just hiked its monthly dividend to $0.236 per share, which gives it a dividend yield of 4.2%. Realty Income has been a favorite stock for income investors given its long track record of raising its dividend and its stable business model.
2. AGNC Investment: Focused on government-guaranteed mortgages
AGNC Investment (AGNC 1.03%) is another REIT with a different business model than Realty Income or most other REITs. While REITs generally invest in properties, AGNC Investment invests in financial assets -- primarily mortgage-backed securities.
If you recently refinanced your home with a loan from Fannie Mae or Freddie Mac, chances are it ended up in a mortgage-backed security and might be on AGNC's balance sheet. Instead of collecting rent, these mortgage REITs collect interest and are always looking for the best value in the mortgage-backed securities market.
Most of AGNC's portfolio is guaranteed by the U.S. government, which means that if the borrower defaults on the loan, AGNC still gets paid its principal and interest. While pretty much every mortgage REIT was hurt by the COVID-19 crisis, AGNC performed better than most given its conservative portfolio.
Mortgage REITs generally have higher dividend yields than other REITs, but their income streams can be somewhat more volatile. We saw evidence of that during the COVID-19 crisis when the financial markets froze and caused many mortgage REITs to cut their dividends. AGNC Investment was no exception, and it cut its dividend by 25% in early 2020.
With earnings and book value back to pre-COVID-19 levels, a dividend hike could be in the cards. At current levels, AGNC yields 8.6%, which is on the low side for its historical range. Provided we don't see any more volatility in interest rates, AGNC could be a core holding for an income investor's portfolio.
