Owning dividend stocks is a great way to generate passive income. While most companies pay dividends quarterly, a few make monthly dividend payments. That makes them even more ideal for passive income since that recurring cash flow aligns with expenses.
Three excellent monthly dividend stocks are AGNC Investment (AGNC 0.97%), Realty Income (O -0.17%), and Stag Industrial (STAG -0.17%). Here's why a few Fool.com contributors believe they're great options for generating passive income.
The Fed is slowing the pace of rate increases
Brent Nyitray (AGNC Investment): AGNC Investment is a mortgage real estate investment trust (REIT) that focuses on buying mortgage-backed securities, which are guaranteed by the U.S. government. Unlike the typical REIT, which focuses on property development and leasing, mortgage REITs don't buy real properties. They buy real estate debt -- in other words, mortgages. If you recently bought a house and used a mortgage guaranteed by Fannie Mae or Freddie Mac, chances are it ended up in a mortgage backed security, which could be owned by a mortgage REIT like AGNC Investment.
Last year was difficult for the mortgage REIT space as mortgage-backed securities underperformed Treasuries. The Federal Reserve raised the federal funds rate aggressively in order to defeat inflation. This caused the mortgage-backed securities in AGNC's portfolio to fall in value. AGNC uses hedges in order to insulate against this exact phenomenon, and if the hedges worked perfectly, the company would be indifferent to rising rates. That didn't happen last year, as the profit from the hedges was insufficient to offset the losses on the portfolio. As a result, AGNC Investment's book value per share fell during 2022.
In the fourth quarter of 2022, mortgage-backed securities started outperforming Treasuries, which helped improve AGNC's book value per share. The mortgage REIT sector has seen a spate of dividend cuts, but so far AGNC Investment has managed to maintain its $0.12 monthly dividend. As long as mortgage-backed security performance continues to catch up with Treasuries, then the dividend should be safe. At current levels, AGNC Investment has a dividend yield of 12.6%, which should be attractive for an income investor.
The Monthly Dividend Company
Matt DiLallo (Realty Income): While quite a few companies pay a dividend each month, Realty Income built its business to deliver a dependable monthly dividend. The REIT even calls itself The Monthly Dividend Company. And for a good reason. It has declared 632 consecutive monthly dividends throughout its over five-decade operating history.
The company's mission is to invest in people and places to enable it to provide a dependable monthly dividend that increases over time. It has delivered on that goal over the years. The REIT has increased its payout 119 times since its public listing in 1994, including for the past 101 consecutive quarters. It has grown its payout -- which currently yields an attractive 4.7% -- at a 4.4% compound annual rate.
Realty Income should continue delivering a growing dividend. The REIT has a strong financial profile, giving it lots of flexibility to continue expanding its real estate portfolio. It has a conservative dividend payout ratio -- 75.7% of its adjusted funds from operations (FFO) in the fourth quarter -- and one of the highest credit ratings in the REIT sector.
Meanwhile, the company continues to expand its growth prospects. It recently made its first acquisition in the gaming sector, formed a real estate development partnership for vertical farming, invested in the consumer-centric medical industry, and purchased its first properties in Italy. Those deals expanded its already sizable growth prospects to acquire single-tenant net lease properties across the U.S. and Europe.
That combination of income and growth makes Realty Income stand out as a top option for those seeking a monthly passive income stream.
This warehouse owner stores value and ships cash monthly
Marc Rapport (Stag Industrial): Stag Industrial is the only pure-play industrial REIT among monthly dividend payers, and generates its income from a collection of 563 buildings in 41 states. Its diverse list of tenants is led by Amazon at but 3% of its rent roll.
Stag launched in 2011 and has raised its payout at least once a year since it began monthly dividends in October 2013. Tenant demand for its space and services and investor demand for warehouse stocks, which spiked during the pandemic, has helped this REIT easily outpace both the S&P 500 and the Vanguard Real Estate ETF, an exchange-traded fund that typically holds about 160 REITs.
STAG Total Return Level data by YCharts
Stag stock is currently selling for about $35 a share and yielding about 4.2%. While that yield is certainly not as high as some other REITs, especially mortgage REITs, it does compare favorably with some of Stag's direct competitors, such as giant Prologis at about 2.6%, Rexford Industrial Realty at about 2.1%, and Terreno Realty at about 2.5%.
That difference isn't just from share price movement. All four of these REITs' stocks are down from about 7% to 13% from the highs they hit at the peak of the pandemic-driven thirst for logistics stocks like this. But looking at the ratio of share price to funds from operations per share, a good measure of market valuation for REITs, Stag is by far the cheapest at 13.6, while Prologis and Terreno are both in the 18-to-19 range, and Rexford is at a lofty 30.4 or so.
Stag's payout record and its solid position in such a promising sector make it a good candidate for long-term buys by income-focused investors.
