If you’re investing for income, you probably want that income to hit your bank account as smoothly and as frequently as possible so that you can plan your expenditures with a relative degree of confidence. A roller-coaster ride of highs and lows in your bank balance would make it more difficult to pay bills on time, unless you are extremely good at sticking to a rigid budget.
To that end, it would be prudent to invest in companies so that your dividend distributions fall approximately evenly across the quarter. If all of your companies pay in one month, with none during the other two months, you haven’t achieved your goal of continuity.
I recently read an article on Seeking Alpha that discusses five companies that pay their distributions monthly. All of these companies yield over 4%, as well, which makes them especially attractive to income investors. Four of these companies are actually REITs, while one is not.
In this article, I will examine those five companies based on my own system, and see whether or not I believe they are worth buying at this point.
In my examination, I review companies based on seven different criteria: yield, number of years paying and raising dividends, five-year Dividend Growth Rate (DGR), five-year projected Earnings Growth Rate (EGR), total return for the past twelve months, PE, and payout ratio. I feel that this selection covers the past dividend-paying history, the potential future earnings growth, and the valuation of the company.
I constructed a rating system that awards points for each of the previous named criteria. A “perfect” score would be 28 points, with four points awarded in all seven categories. I used this system to select 10 companies for what I call my Perfect Dividend Portfolio.
The first company is LTC Properties Inc (NYSE:LTC), a REIT that focuses on the senior market. The article cites the trust’s strong fundamentals, solid balance sheet, and 4% distribution.
The trust is currently trading at approximately $48 and yields 3.90%. It has paid dividends since 1992, but froze the dividend from 2008 to 2009, so its history of raising dividends is only 4 years. The five-year DGR is 3.6% and the total twelve-month return is 55.8%.
Other metrics that I use when calculating a rating for a dividend company include analysts’ five-year annual growth estimate (5.6%) and the company’s PE (30.6).
LTC Properties Inc (NYSE:LTC)’s dividend-payout ratio seems unreasonably high, at 117%. Of course, REITs are different from other dividend-paying companies, in that the trust by law must pass through at least 90% of their taxable income to the trust owners. This can skew the payout ratio when it is derived from earnings, so the better comparison is the payout based on FFO (Funds From Operations), which is a more reasonable 75%.
LTC Properties Inc (NYSE:LTC) scores an 11 on my ratings system. Yes, its stock price has had an impressive run over the past twelve months and its monthly distribution is attractive, but I don’t think that obtaining the consistency of the monthly payment is worth giving up the other factors that I feel are important.
The second company is Realty Income Corp (NYSE:O) , another REIT, which I have examined before. It’s one of the more popular REITs, and has been consistently raising its distribution for 15 years, which makes it eligible for inclusion in my portfolio. The trust has been paying dividends for a total of 44 years. The share price is up 45% in the past twelve months.
Realty Income Corp (NYSE:O) is currently trading at approximately $55 and yields 3.60%. The five-year DGR is 3.6% and the total twelve-month return is 49.5%.
Other metrics include analysts’ five-year annual growth estimate (1.2%) and the company’s PE (25.1). The payout ratio based on FFO is 92%.
Again, this is a REIT, and the PE ratio and PEG ratio for this industry tend to be much higher than for the S&P 500.
The third company on the list is the only non-REIT, Shaw Communications Inc (USA) (NYSE:SJR) . Shaw Communications Inc (USA) (NYSE:SJR) is currently trading at approximately $24 and yields 4.40%. The five-year DGR is 6.4% and the total twelve-month return is 26.9%. The company has been raising dividends for 10 years.
Other metrics include analysts’ five-year annual growth estimate (10.1%) and the company’s PE (14.2), and the payout ratio is 62%.
Shaw Communications Inc (USA) (NYSE:SJR) scores a 16 on my system, which keeps it within my radar for potential inclusion at some point in the future.
Number four on the list is Inland Real Estate Corporation (NYSE:IRC) , a retail REIT centered in Chicago.
Inland Real Estate Corporation (NYSE:IRC) is currently trading at approximately $12 per share and yields 4.70%. The trust’s distribution has been frozen at $0.57 per year since 2010, when it cut the distribution by 23% from its 2009 level. The trust has returned 50% over the past twelve months.
Other metrics include analysts’ five-year annual growth estimate (-24%) and the company’s PE (93.2); the payout ratio is 63% of the FFO.
Inland Real Estate Corporation (NYSE:IRC) scores a 10.
The last company in the list of monthly high-yielders is American Realty Capital Properties Inc (NASDAQ:ARCP), a commercial REIT. It is currently trading at approximately $18 and yields 5.10%. Its distributions only began in 2011, and have been raised several times, so that the current distribution is 4% higher than the initial distribution in September 2011. The trust has returned 71% over the past twelve months.
Full-year 2013 EPS is a reduction of 14% versus 2012, and the estimate for 2014 is a 21% increase over 2013;
Other metrics include analysts’ five-year annual growth estimate (NA), the company’s PE (18.7) and its payout ratio is 92% of FFO.
Again, I really don’t see what there is to like in this REIT when compared to other well-established dividend-payers.
I’ve prepared a chart which shows how each company scores on my rating system.
| Years | Yield | DGR | EGR | Payout | Total Return | PE | TOTAL | |
|---|---|---|---|---|---|---|---|---|
| LTC | 0 | 4 | 0 | 1 | 2 | 4 | 0 | 10 |
| O | 2 | 3 | 0 | 0 | 1 | 4 | 0 | 10 |
| SJR | 1 | 4 | 1 | 3 | 1 | 4 | 2 | 16 |
| IRC | 0 | 4 | NA | NA | 2 | 4 | 0 | 13 |
| ARCP | 0 | 4 | NA | NA | 0 | 0 | 2 | 10 |
High yields and monthly distributions would be fantastic for an income portfolio, but those factors alone are not worth sacrificing the stability and reliability of regular quarterly-paying dividend companies.
There’s a reason why there are no REITs in my Perfect Dividend Portfolio. Even Realty Income Corp (NYSE:O), the oldest and most popular, does not come anywhere close to qualifying under my criteria. These companies have impressive share price increases over the past year or so, but I really don’t understand the attraction.
If you want companies with great dividend-paying histories, with excellent yields, with strong prospects for future and good current valuations, I encourage you to check out my Perfect Dividend Portfolio. It holds what I believe are the ten best.
The article 5 High-Yield Dividend Companies That Pay Monthly originally appeared on Fool.com is written by Karin Hernandez.
Karin Hernandez has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Karin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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