Dividend stocks can be an excellent source of passive income. The problem is that many dividend payers make distributions quarterly, which doesn't align with people's recurring monthly expenses. But there are several dividend stocks that make monthly distributions and provide a reliable source of income.
One stellar dividend stock that makes monthly distributions to investors is Stag Industrial (STAG -0.17%). With its 4.1% dividend yield, the real estate specialist is an excellent source of recurring, reliable passive income. Here's why it could make a solid addition to your portfolio.
Why Stag is a good source of recurring income
Stag Industrial is a real estate investment trust (REIT) that acquires and operates industrial properties across the U.S. REITs benefit from specific tax laws that allow them to avoid paying corporate taxes as long as they distribute 90% of their taxable income to shareholders through dividends. For this reason, REITs can be solid dividend stocks for investors looking to generate passive income in their investment portfolios.
REITs can be involved in all types of real estate. Stag Industrial focuses on properties used in the industrial sector, which include manufacturing, logistics, and warehousing. At the end of 2022, Stag Industrial owned 562 buildings in 41 states, with 86% of its facilities in warehouse and distribution.
The REIT focuses on purchasing buildings from clients, usually through sale-leaseback transactions. These types of transactions appeal to customers because they can raise capital, while Stag Industrial can lease these properties back to clients and enjoy a recurring source of income.
Investors should be aware of this risk to commercial real estate
Industrial real estate is one segment of the broader commercial real estate industry. According to CBRE Group, the world's largest commercial real estate company, that industry has come under pressure over the past year.
Several factors are weighing on commercial real estate. For one, inflation and higher interest rates have made it more expensive for clients to refinance loans at higher interest rates. In addition, banks have significantly pulled back funding from the space since the failures of Signature Bank and SVB Financial's Silicon Valley Bank in March. This has left a gap in financing in commercial real estate that has made things challenging for borrowers and, combined, these factors threaten the values of those commercial properties.
According to CBRE Group, office properties are the most likely to struggle in the coming years as these properties reprice and adapt to higher interest rates. Specifically, the office real estate segment has struggled since the pandemic as people began working from home more frequently.
One positive takeaway is that industrial properties should weather the storm better than others. According to CBRE, the industrial real estate space should see valuations recover much more quickly than other commercial real estate properties.
Image source: Getty Images.
A solid stock for the long haul
Stag Industrial has some tailwinds that should help it weather difficult commercial real estate market conditions. For one, the growing presence of e-commerce has increased the need for companies to have warehouses and distribution facilities. According to eMarketer, global e-commerce sales are expected to increase 8.8% on average over the next four years.
The company is also in a solid capital position to continue expanding its portfolio of properties in the coming years. Not only that, but Stag Industrial has only $53 million in debt (of nearly $2.5 billion) that will mature by the end of 2024 -- meaning it doesn't have an immediate need to refinance debt.
Stag Industrial is a well-run real estate company poised to keep growing in the coming years. It should have no problem maintaining its dividend. Over the last 12 months, it has paid out $1.46 in dividends per share, producing a payout ratio equal to 58% of its funds from operations (FFO) per share -- making it a solid dividend stock you can trust to cut you a monthly check.
