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3 Monthly Dividend REITs to Buy in July


Jul 08, 2020 by Matthew DiLallo

One of the main attractions of real estate investment trusts (REITs) is their dividends. These income streams, which tend to be above average, provide investors with cash flow they can use to meet some of their expenses. If there's one drawback to these dividend payments, they're typically in quarterly installments, which doesn't align with an investor's monthly budgetary needs.

Because of that, REIT investors have to weigh their options if they want to generate recurring income to meet their expenses. They either need to budget accordingly, buy REITs with staggered payment schedules, or invest in a monthly dividend stock. Here's a look at some things to consider when investing in REITs that pay investors each month as well as some top options to buy.

What are monthly dividend REITs?

Monthly dividend REITs are real estate companies that choose to distribute dividend income to their investors on the same monthly schedule as they collect rent from tenants. Because of that increased frequency, these monthly dividend payers are even more like being a landlord, though without all the associated headaches, making them ideal passive investments.

Potential pitfalls of monthly dividend REITs

While a more frequent dividend payment is an attractive feature for a REIT, it doesn't automatically mean it's a good investment. Thus, an income investor needs to weigh other factors, such as the sustainability of the dividend payment. Characteristics to consider:

  • Whether it has a conservative dividend payout ratio. While REITs often pay more than 100% of their taxable net income, they should distribute less than 100% of their funds from operations (FFO), with 80% or less being an ideal number.
  • The health of its balance sheet. REITs rely on debt to help them finance acquisitions and development projects. Because of that, they need ample financial flexibility to continue growing. Ideally, they'll have an investment-grade balance sheet backed by a leverage ratio of less than 6.0 times debt to EBITDA.
  • If the REIT has a solid property portfolio and growth prospects. REIT investors also need to make sure a company can continue paying dividends. That means owning high-quality properties in growing markets.

A monthly dividend REIT lacking more than one of these characteristics is at higher risk for a dividend cut, which is why investors need to consider more than the frequency of a company's cash dividend.

Top monthly dividend REITs to buy this month

Monthly dividend REITs are a great way to generate income from real estate that matches an investor's expenses. While not all REITs that pay investors each month are worth buying, the sector does offer several excellent options. Three top ones to buy this July are SL Green (NYSE: SLG), STAG Industrial (NYSE: STAG), and Realty Income (NYSE: O).

SL Green

Office REIT SL Green currently pays its investors $0.295 per share each month, which at the recent stock price of around $47 a share gives it an implied yield of 7.6%. That payout is on a firm foundation. While some of SL Green's tenants are struggling to pay rent due to COVID-19 (collections averaged 89.1% in April and 85.7% in May as of its latest update), the company historically only pays out a conservative 50% of its cash flow to support its dividend. That gives it lots of breathing room. On top of that, the REIT has a strong balance sheet, including $1 billion of cash that it raised this year to bolster its liquidity.

For Manhattan's largest office landlord, there are some concerns that an acceleration in work-from-home trends following the pandemic could impact SL Green's occupancy and rental rates. While that's a trend to watch, the company does boast a high-quality, long-dated, and creditworthy rent roll, as well as a healthy deal pipeline, which should help mute some of the impacts. Because of that, SL Green's monthly payout seems sustainable despite the near-term uncertainty.

STAG Industrial

Industrial REIT STAG Industrial currently pays a $0.12 per share monthly dividend. With shares currently trading at around $28 apiece, STAG yields about 5.2%. That payout is also on solid ground despite all the turmoil in the real estate sector. Overall, most of its tenants continue to pay their rent on time, with it collecting 90% of April's billings as of its first-quarter report.

While the delays in receiving some rent will impact its FFO this year, it has some cushion since it typically pays out less than 80% via the dividend. On top of that, it has an investment-grade balance sheet, backed by a low leverage ratio of 4.4 times debt-to-EBITDA ratio. That solid financial profile gives STAG the flexibility to continue expanding its industrial property portfolio while maintaining its monthly dividend.

Realty Income

Realty Income calls itself "The Monthly Dividend Company." It has certainly lived up to that name over the years as it has paid its investors for an impressive 600 consecutive months. Even better, it has increased its dividend for 107 straight months, with July's payment set at $0.2335 a share. That payout rate implies an annualized yield of around 4.7%, given the recent share price.

The company has been so successful in paying a monthly dividend because it maintains a rock-solid financial profile. It has A-rated credit backed by a low 5.0 times leverage ratio. It also has a conservative dividend payout ratio of 79.4%. Those factors help provide plenty of cushion during the current environment where some tenants have held back rent (it collected 82% of May's rent as of its latest update). Because of that, Realty Income should have no problem continuing to make its monthly payments.

Great options for a monthly income stream

This trio of REITs pays its investors each month, and those payouts are backed by rock-solid financial profiles. Because of that, they should survive the current challenges of the real estate market as well as future ones. That sustainability makes them great options for income-seeking REIT investors to buy this July.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Stag Industrial. The Motley Fool has a disclosure policy.

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