Investing in dividend stocks can be a great strategy to generate passive income. However, a potential drawback is that many companies pay dividends quarterly. That creates a challenge for those relying on this income to cover their monthly living expenses.
A handful of companies solve this dilemma by paying monthly dividends. A few of those monthly payers stand out to some Fool.com contributors right now for their cheaper prices. Here's why they think Agree Realty (ADC 0.52%), Gladstone Commercial (GOOD 1.42%), and AGNC Investment (AGNC 1.09%) could be attractive options for those seeking a monthly passive income stream.
More income ahead
Matt DiLallo (Agree Realty): Shares of Agree Realty have fallen about 17% from their 52-week high mainly because of rising interest rates. That sell-off has helped drive the retail real estate investment trust's (REIT) dividend yield up to 4.3%. That's an attractive rate, given the S&P 500's dividend yield of 1.6%.
Agree Realty has a great track record of raising its dividend, which it now pays monthly after switching from a quarterly payout schedule in 2021. The REIT increased its dividend by 7.7% last year. Over the past decade, the payout has grown at a 6.1% compound annual rate.
The REIT should be able to continue boosting its dividend in the future. It has a very comfortable dividend payout ratio of about 70% of its funds from operations (FFO). Meanwhile, it has a solid investment-grade balance sheet backed by a low leverage ratio. These features give it the financial flexibility to continue investing in expanding its income-producing real estate portfolio.
Agree Realty has been proactive in raising capital in the current environment, getting out ahead of the surge in interest rates. Because of that, it entered the year with enough liquidity to acquire at least $1 billion of high-quality income-producing real estate without raising any additional capital this year. That positions it to capitalize on falling property values to make higher-return investments. It's also currently investing $118.5 million in 31 development projects. These investments should boost earnings, enabling the REIT to continue increasing its monthly dividend.
A battered share price and transitioning holdings point to a GOOD buy
Marc Rapport (Gladstone Commercial): As a recent retiree, I have a particular affinity for dividend stocks that pay monthly. That cadence syncs nicely with my Social Security draw and a couple of small pensions I have from back in the day when I got vested in businesses with defined-benefit plans before those largely went the way of the dodo.
To fit that bill, though, these stocks have to be issued by companies that themselves are reliable payers, with business models and records that point to sustainability. It doesn't hurt, too, if they're available now at what looks like a favorable price.
That's the case here with Gladstone Commercial, a REIT that owns 137 office and industrial properties in 27 states. Gladstone also owned a record of never reducing its dividend in 20 years as a publicly held trust, until earlier this year. That reduction from $0.1254 a share per month to $0.10, along with headwinds for commercial real estate in general, has caused shares to fall by about 32% this year.
But this might be a good time to buy. The company says it's retaining cash "in anticipation of further economic headwinds," which seems prudent, while it has reduced its internal management fees, authorized as much as $50 million in share buybacks, and is continuing to shed office properties in favor of industrial properties. The latter now generate 56% of the company's rent.
Even with that dividend reduction, Gladstone shares yield about 9.4% at a current price of about $12.50 and analysts on average give it a target price of $17.83. That upside, plus this REIT's long-term record, experienced management, and current strategies give me the confidence to buy into it again after selling my shares after that dividend cut.
Mortgage REITs are out of favor, but the tide is changing
Brent Nyitray (AGNC Investment): AGNC Investment is mortgage REIT that invests in mortgage-backed securities guaranteed by the U.S. government. These are the some of the same type of securities that contributed to Silicon Valley Bank's collapse. Agency mortgage-backed securities values have declined since the Federal Reserve started hiking the federal funds rate a year ago in an effort to tame inflation.
Even though AGNC hedges its interest-rate risk (something Silicon Valley Bank didn't do), mortgage-backed securities underperformed Treasuries, which meant that AGNC Investment has reported losses and declines in book value per share. Since AGNC didn't sell its mortgage-backed security portfolio, however, these unrealized losses can be recouped if mortgage-backed securities outperform in the future.
The amount of underperformance last year was as bad as at the height of the 2008 financial crisis. Part of this was due to the rapid pace of rate hikes. Mortgage-backed securities generally don't react well to interest rate volatility. Now, however, there are a lot of positives about mortgage-backed securities, especially given their yields versus other securities without credit risk, such as Treasuries.
AGNC pays a monthly dividend of $0.12, which gives the company a dividend yield of about 14.5%. Mortgage REITs either cut or eliminated their dividends last year, with AGNC as the lone holdout. If mortgage-backed securities begin to outperform Treasuries, then the dividend should be safe. Much will depend on the Fed. Once the Fed gives the all-clear signal that interest rate hikes are over, then the mortgage REIT companies will be investible again, and investors can find an attractive monthly dividend.
