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5 Monthly Dividend Stocks for 2015

With the market looking wobbly this December, the need to get paid in cold, hard cash has never been more apparent. If you are already in retirement, selling portfolio positions in a declining market to meet your living expenses is, for lack of better word, scary. Living off of dividend and interest income makes for a far less stressful retirement.

But while I am a major believer in dividend investing, there has always been one major disconnect with it: most of us pay our bills on a monthly cycle, yet our dividend checks arrive only once per quarter or, in the case of some international stocks, once or twice per year.  And with bonds, the story is much the same. Most bonds pay interest semiannually. This can make budgeting a headache and adds an extra level of planning.

Paying a dividend is an established sign of shareholder friendliness. But companies that pay their dividend monthly really take shareholder friendliness to the next level. There are actually quite a few companies trading today that pay their dividends monthly, and we’re going to take a look at some of my favorites today.

Before we get started, I want to make one important clarification. We should never buy a stock simply because it pays its dividend monthly. That would be phenomenally bad investing. When buying a dividend stock, dividend safety is your biggest priority followed by the possibility for dividend growth. A monthly payout—while convenient—is only a consideration once the first two conditions are met.

With that said, let’s jump into it.

Realty Income

I’ll start with a REIT that bills itself as the “Monthly Dividend Company,” Realty Income (O).

Realty Income paid its first dividend in 1970, before it was publically traded, and hasn’t slowed down since.  It’s paid 532 consecutive monthly dividends and raised its dividend 77 times—and in 68 consecutive quarters.

Since 1994, when Realty Income started trading on the NYSE, the REIT’s annualized dividend has risen from $0.90 per share to $2.197 per share.  At its current price, that amounts to a dividend yield of 4.8%.

Realty Income is one of those rare stocks that I believe you can truly buy, put in a drawer, and forget about for years at a time.  As a conservative, triple-net REIT, It’s what I would call an “Armageddon-proof” investment.  It owns a diversified portfolio of 4,200 properties spread across 49 states that are rented under long-term leases primarily to high-quality tenants.  The “typical” property for Realty Income would be your local Walgreens or CVS pharmacy—a high traffic, highly visible location that you pass on your daily commute.

Under a triple-net lease, it is the tenants responsibility to take care of the property and to pay the taxes and expenses.  The landlord’s only role is to collect the rent check.  Not bad work, if you can find it.

Last year, I listed Realty Income as a stock you can “buy and hold forever,” and I would reiterate that recommendation today.

LTC Properties

Next up is LTC Properties, Inc. (LTC), a real estate investment trust that invests primarily in the long-term care sector of the health care industry, including long-term care provider properties, skilled nursing properties, assisted living properties, independent living properties and memory care properties.  LTC also invests in first-lien mortgages secured by long-term care properties.

A little over 80% of LTC’s portfolio is invested in properties with the remainder in mortgages.  And among properties, skilled nursing is the biggest single segment, at 55%.  Assisted living comes in second at 37%.

LTC is backed by absolutely fantastic macro trends.  As the Baby Boomers age, there will be unprecedented demand for long-term services—and thus unprecedented demand for long-term care facilities.

The elephant in the room when discussion long-term care is, of course, Medicare.  It’s no secret that the U.S. government is short of funds these days, and Medicare cutbacks have been an unfortunate outcome. But that is what makes LTC such an attractive way to play the trend of Boomer aging.  LTC is a landlord, not a care provider, so Medicare cutbacks will have little impact on revenues.  And even better, as with Realty Income, most of LTC’s properties are leased under triple-net leases, meaning the tenant covers taxes, insurance and maintenance.

LTC’s monthly dividend works out to a current yield of 4.9%.

DoubleLine Income Solutions

Next up is DoubleLine Income Solutions (DSL), a closed-end bond fund run by one of the very best managers in the business, Jeff Gundlach, and his team.  Gundlach—dubbed the “King of Bonds” as a rival to “Bond King” Bill Gross—has done a fantastic job of navigating the treacherous bond markets of the past several years, and an investment in DSL is largely an investment in Gundlach.

DSL invests primarily in U.S. corporate bonds, though it also invests in Treasuries, mortgage securities and international bonds.

Closed-end bond funds are interesting investments in that, unlike ETFs and mutual funds, their market value can vary wildly from their net asset value (“NAV”). As a general rule, I do not recommend buying a closed-end fund at a premium to its NAV. If you’re patient and willing to wait, you can generally get them at a discount.

My guidance here is to buy DSL so long as it trades at a discount to NAV of at least 5%.  As of Morningstar’s latest estimates, we’re comfortably within that range at a 8.25% discount. If you believe, as I do, that rates will stay depressed for the foreseeable future, DSL should be a safe place to park cash.  You’re in good hands with Gundlach.

Prospect Capital

For my last two picks, I’m going to get a little more speculative. In both cases, I believe that the dividend is safe at current levels or that any cuts would be small and temporary.

I’ll start with a high-yielding business development company (“BDC”) with large-scale buying by company insiders: Prospect Capital Corporation (PSEC).

PSEC invests primarily in first-lien and second-lien senior loans and mezzanine debt and provides financing for leveraged buyouts, acquisitions, recapitalizations, and capital expenditures for growth. PSEC also invests in the higher-risk but potentially much higher-return equity tranches of collateralized loan obligations. Most of PSEC’s individual investments would have to be considered risky given the early stages of the companies involved, but the portfolio is diversified across a wide variety of industries.

PSEC recently cut its dividend to 8.333 cents per month from 11.1 cents. But even after the reduction, PSEC sports a dividend yield 12.1%.

And the effective yield may end up being higher. In their recent press release, management indicated that additional special dividends are a real possibility over the next 12 months.

Speaking of the management team, company insiders has been aggressively buying the stock on the open market.  In just the current quarter, four company insiders have purchased 576,212 shares worth $4.7 million at current prices. Company insiders have been aggressively buying all year and there have been no sales. That kind of buying is a major endorsement by the people running the company.

American Realty Capital Properties

And finally, we get to the red-headed stepchild of the triple-net REIT world, American Realty Capital Properties (ARCP).

ARCP has taken a beating over the past two months after an accounting scandal that the now former CFO and chief accounting officer tried to cover up.

“Accounting scandals” brings to mind horrible memories of the Enron collapse, so investors promptly dumped ARCP, creating what I believe to be a fantastic bargain. The accounting adjustments were minor, reducing funds from operations by about 46 cents over the span of two quarters. And after the selloff, ARCP now trades just below the liquidation value of its real estate holdings.

At current prices, ARCP yields about 10.9%. A yield that high generally indicates that the market is pricing in a dividend cut, and indeed, ARCP may decide to modestly trim its dividend in the next year. But I would expect any cut to be in the range of 5%-10% at most.

ARCP is a little riskier than the rest of the stocks covered in this article, but at current prices I consider it well worth the risk.

Disclosures: Long O, DSL, PSEC, ARCP

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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Intel is Back as a Dividend Raiser

Intel Corporation (INTC)—the world’s largest maker of semiconductors—finally rejoined the ranks of dividend raisers after a long hiatus. Starting in the first quarter of 2015, INTC will pay a $0.24 quarterly dividend, up from the $0.225 dividend it has paid since August of 2012. This represents a 7% bump.  That’s not too shabby, but as a long-time holder of Intel stock, I’m expecting to see more in the quarters ahead.

Nine consecutive quarters without a dividend hike was a long stretch for investors in Intel stock. To find a longer streak, you’d have to go back to the late 1990s and early 2000s, when Intel stock was still a sexy growth story and the darling of both Wall Street and Silicon Valley.  Today, we see a very different Intel: more mature, more shareholder friendly, and—most importantly—far more reasonably priced.

Let’s dig deeper. For most of the past two years, no one wanted to own Intel stock. It was yesterday’s news, a stodgy, old technology company that had missed the mobile revolution and hitched its wagon to a crippled horse: The Microsoft (MSFT)-dominated PC market.

To be fair, some of this criticism was warranted.  Intel didn’t jump into the mobile market nearly fast enough, and it lost serious market share to Arm Holdings (ARMH), Qualcomm (QCOM) and others.  INTC then had to play an aggressive game of catchup—which meant a surge of new investment and capital spending. This crimped profits and made a lot less cash available for dividends.

But then, a funny thing happened. All of that investment started to pay off, and INTC has started growing again. After three years of slugging revenue growth, INTC expects to see revenue growth in the mid-single digits next year. It helps that global PC sales stopped declining, of course. But Intel is also expected to sell about 40 million tablet chips this year.

Intel’s estimates might prove to be too conservative. Both consumers and corporate buyers have put off upgrades for years, preferring to cut costs and spend technology dollars on tablets and smartphones.  But old computers eventually have to be replaced, and Barron’s reports that there are 600 million PCs currently in use that are four years old or older.  And Intel’s server business is stronger than ever.  Intel expects revenue growth from its server group of about 15% per year through 2018.

Let’s jump back into INTC’s dividend.  At today’s prices, INTC’s $0.24 quarterly dividend represents a yield of 2.7%. That may not get your blood pumping, but it’s worth noting that it’s significantly higher than the 2.3% yields on offer on the 10-year Treasury.

I also have every reason to believe that INTC’s recent dividend hike was the start of many. Intel’s capital spending—which has been elevated for the past few years—is returning to more normal levels. This means more cash available for shareholders. It’s also worth noting that Intel’s dividend payout ratio is a modest 43%. Even if Intel’s earnings growth flatlines, there is room for further dividend growth.

Now, the fun part. Intel stock had fallen off of a lot of investors’ radars during its nine-quarter pause in raising its dividend. But we shouldn’t forget that from 2004 to 2012, INTC was a dividend-raising monster. In 2004, Intel doubled its dividend…and then doubled it again in 2005. Over the eight-year stretch, INTC raised its dividend by more than a factor of 10.

INTC-dividend

GuruFocus breaks down one of my very favorite dividend metrics, yield on cost.  This is today’s annualized dividend divided by your original purchase price, or the effective dividend yield you would be enjoying on your original investment.  Had you bought Intel stock five years ago, you’d be enjoying a yield on cost of 4.7%.  Had you bought Intel stock ten years ago, you’d be enjoying an eye-popping yield on cost of 12.9% after a decade of 17.7% annualized growth.

Do I expect Intel stock to enjoy that kind of dividend growth over the next five or ten years? Realistically, no. Intel started at a much lower base ten years ago, and 17.7% annualized growth would be a stretch.  That said, I do believe that annual dividend growth of 7%-10% is very likely.

One final consideration: While Intel has been somewhat stingy with dividend hikes in recent years, it has continued to buy its own shares on the open market. Over the past three years, INTC has repurchased about 3.6% of its shares per year.   Since 2004, INTC has reduced its share count by about a quarter. So, even while Intel has been mired in slow growth, the company has still managed to take care of its shareholders.  Now that the company is returning to growth, I only expect that to continue.

Disclosures: Long INTC, MSFT

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Dividend Smackdown: Microsoft vs ExxonMobil

Big-tech behemoth Microsoft Corporation (MSFT) leapfrogged ExxonMobil Corporation (XOM) last week to become the second-largest company in the world by market cap. MSFT stock weighs in at a valuation of $405 billion compared to $402 billion for XOM stock.

Both still have a long way to go before catching up with Apple Inc.’s (AAPL) world-leading $671 billion market cap, but the reversal is telling. Just a year ago, Exxon was considered the bluest of blue chips, and Microsoft was a tech dinosaur that had been left in the dust by Apple, Google (GOOG) and others. But today, with crude oil prices in freefall and with Microsoft resurgent under CEO Satya Nadella, MSFT stock has the momentum.

I’m actually bullish on both stocks.  I’ve been long Microsoft for years, and I have indirect exposure to ExxonMobil via a position in the Energy Select SPDR ETF (XLE). Both stocks are monster dividend payers with long histories of rewarding their shareholders. Today, we’re going to put Microsoft and ExxonMobil in the ring for a dividend smackdown. May the best dividend payer win!

XOM-MSFT-Dividend

Exxon Mobil Corporation

We’ll start with ExxonMobil.  XOM stock currently yields 2.8%. This isn’t a monster payout by any stretch, but it is competitive in a world in which the 10-year Treasury yields a pitiful 2.3%.

ExxonMobil pays out only 33% of its earnings as dividends. So, come what may with the price of crude oil, there is still plenty of room for dividend growth in the years ahead.  And indeed, ExxonMobil has been a serial dividend raiser over time, boosting its payout every year for the past 32 years.  Over the past five years, it has raised its dividend at a 10.7% clip.  Over the past ten years—a period that included the 2008 meltdown—it has raised its dividend at a 9.4% clip.  That’s not too shabby!

Let’s take a look at one of my favorite metrics: Yield on cost. Yield on cost is the current annual dividend divided by your original purchase price. This is the cash return that you’d enjoy for buying and holding a dividend stock, and it’s an important consideration for a stock like XOM with a modest current yield but a long history of dividend raising.

If you had bought ExxonMobil five years ago and held it until today, you’d be enjoying a yield on cost of 4.8%. Had you bought it ten years ago, you’d be enjoying a yield on cost of 6.9%.  You’d have a hard time buying junk bonds offering a yield that high today. But such is the compounding power of dividend growth.

Microsoft Corporation

Microsoft sports a slightly lower yield than ExxonMobil at 2.3%.  It also has a slightly higher dividend payout rate at 44%.  But the dividend payout rate is still low enough to suggest that years of healthy dividend boosts are doable for Microsoft.

Microsoft’s dividend growth rate blows ExxonMobil’s out of the water.  Over the past five years, Microsoft has boosted its dividend at a 20.0% annual rate.  And over the past 10 years, it’s grown it at a very impressive  14.3% annual rate.

Part of this is due to Microsoft being newer to the world of dividend paying.  Microsoft declared its first dividend just 11 years ago, and its initial quarterly payout was modest.  But it’s fair to say that Microsoft is making up for lost time with its aggressive dividend hiking.

Can it continue?  Well, let me put it this way: It’s showing no signs of slowing down.  Microsoft grew its dividend at a 21.7% clip over the past year.

Looking at yield on cost, had you bought Microsoft stock five years ago, you’d be enjoying a 5.7% yield today.  Had you bought Microsoft stock ten years ago, you’d be enjoying an 8.6% yield today.  These are the kinds of yields you normally only find in speculative mortgage REITs and business development companies.

So…who wins the dividend smackdown?

I’m giving this round to Microsoft based on its higher dividend growth rates.  But Exxon Mobil is a worthy competitor, and I would recommend both for a diversified income portfolio.

Disclosures: Long MSFT, AAPL

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Prospect Capital: Massive Insider Buying in this High-Yielding BDC

A high dividend yield, large-scale buying by company insiders, and recent buying by funds controlled by Joel Greenblatt and George Soros.

Sound interesting?  Then I suggest you take a look at shares of Prospect Capital Corporation (PSEC), a business development company (“BDC”) traded on the Nasdaq.

If you’re unfamiliar with BDCs, you can think of them as publically-traded private equity firms.  BDCs provide financing to small and middle-market companies that are too early in their development to get funding from more traditional sources, such as the bond and equity markets. It’s a high-risk but potentially very high-return financing niche.

Similar to REITs, BDCs pay no taxes at the company level on the condition that they distribute at least 90% of their income to their investors via dividends.  This makes BDCs some of the highest-yielding investments on the market, but—as is the case with REITs and MLPs—their inability to retain earnings for future growth also means that they regularly have to issue new shares, which dilutes current shareholders. That’s not necessarily a bad thing if new investments are accretive to earnings.  But it means that management has to be extremely disciplined.

Let’s dig into the details of Prospect Capital.  PSEC invests primarily in first-lien and second-lien senior loans and mezzanine debt and provides financing for leveraged buyouts, acquisitions, recapitalizations, and capital expenditures for growth. PSEC also invests in the higher-risk but potentially much higher-return equity tranches of collateralized loan obligations. Most of PSEC’s individual investments would have to be considered risky given the early stages of the companies involved, but the portfolio is diversified across a wide variety of industries.

PSEC pays an absolutely massive dividend, sporting a current dividend yield of 13.7%.  Now, normally, that would make me pause.  An exceptionally high yield is often a major red flag for an income investment, as it is often a prelude to a dividend cut.

In PSEC’s case, our risk is mitigated by three major factors.  First, the company managed to sail through the 2008 meltdown without slashing its dividend. The company survived Armageddon with its dividend intact; that says a lot about its staying power.  Secondly, the company has continued to modestly raise its dividend throughout 2014.  And finally, the company’s management team has been aggressively buying the stock on the open market.  If a dividend cut were likely, I have a hard time believing the people running the company would be putting millions of their own dollars into the stock.

Speaking of the insiders, let’s take a deeper look at what exactly they have been up to:

InsiderPositionDateSharesTrade Price ($)Cost ($)
John F BarryCEO9/16/2014100,00010.171,017,000
Eliasek M GrierCOO9/16/20145,00010.1050,500
Eliasek M GrierCOO8/29/201420,00010.26205,200
Eugene StarkDirector8/28/20144,00010.3241,300
Brian OswaldCFO 8/27/201427,30010.40283,900
John F BarryCEO6/13/2014100,00010.371,037,000
Eliasek M GrierCOO6/12/201424,00010.28246,700
John F BarryCEO6/12/2014100,00010.331,033,000
Brian OswaldCFO 6/12/201430,00010.25307,500
Eugene StarkDirector6/12/20141,00010.2710,300
John F BarryCEO3/20/2014100,00010.861,086,000
Eugene StarkDirector2/6/20141,00011.1011,100

Four company insiders—including the CEO, CFO and COO—have collectively poured $5.3 million into PSEC stock in 2014, and all at prices higher than those we see today.  CEO John Barry made a mill-on-dollar purchase as recently as a month ago.

Oh, and as an added sweetener, funds controlled by hedge fund gurus Joel Greenblatt and George Soros have recently taken positions in the stock.

Are there any risks we should be concerned about here?

Sure.  PSEC’s dividend payout ratio is currently 125%, which means that PSEC is effectively issuing debt and new equity to fund its current dividend. That is sustainable in normal, healthy capital markets.  If we were to see the markets seize up again as they did in 2008, PSEC’s dividend would be at risk.  But I consider that risk small enough to safely ignore for the time being.

PSEC’s stock currently trades at a 10% discount to book value.  This means that you could hypothetically sell the company for spare parts and come away with a decent profit.  While PSEC is mostly an income play, the discounted stock price makes respectable capital gains over the next year likely as well.

Disclosures: Charles is currently long PSEC in his Dividend Growth portfolio.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

 

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Update on the DRIP and Forget Portfolio

One of my most popular portfolios in the Sizemore Investment Letter and Macro Trend Investor was the “DRIP and Forget” portfolio, also called the “Core Dividend Portfolio.”  I’ve created a landing page here to track the portfolio’s continued progress, and I will periodically post updates in Sizemore Insights.

I’ve also added a new column–“yield on cost”–which calculates what your effective dividend yield today would be based on the original price at which I recommended the stock.  I realize that most people reading this today will not have purchased the stock at my original recommendation date.  I’m ok with that.  This is for illustrative purposes only.  My goal here is merely to show you how a solid dividend portfolio can provide for your income needs in retirement.

The DRIP and Forget portoflio is a supplementary list of recommendations that I consider a substitute for fixed income. As with all investments in the stock market, it will have more short-term volatility than a fixed income portfolio, but taken as a group, I consider the investments in this list a viable substitute for retirement income. Unlike bond interest, their dividend payments can be expected to rise over time. The DRIP and Forget stocks are intended to be held long-term in a dividend reinvestment program (“DRIP”), hence the name “DRIP and Forget.”

Total returns are cumulative and include capital appreciation and dividends assuming the buy price and buy date shown.

*Last updated October 14, 2014

CompanyTickerBuy DateBuy PriceCurrent PriceCurrent YieldYield on CostTotal Dividends RecievedTotal Return
Abbott LaboratoriesABT11/5/201230.8141.312.15%2.86%$1.4438.04%
Colgate-PalmoliveCL11/8/201036.4164.042.24%3.95%$4.7588.93%
DiageoDEO10/8/201070.8109.923.75%4.88%$11.7668.81%
IntelINTC7/21/201021.2631.892.86%4.23%$3.5466.65%
Johnson & JohnsonJNJ7/7/201059.0896.862.74%4.74%$9.6880.33%
Kimberly-ClarkKMB8/6/201065.29106.553.12%5.15%$12.8481.57%
Altria GroupMO7/7/201020.5446.134.52%10.13%$7.36157.89%
MicrosoftMSFT7/7/201023.8244.182.84%4.70%$3.61100.63%
National Retail PropertiesNNN7/8/201034.9736.634.66%4.80%$0.817.06%
NestleNSRGY12/8/201056.0670.933.39%4.32%$8.624.19%
Realty IncomeO7/8/201342.6543.345.15%5.15%$2.556.75%
Procter & GamblePG7/7/201059.3483.33.09%4.34%$9.4956.37%
Philip Morris InternationalPM4/8/201052.5284.284.76%7.62%$14.4286.02%
UnileverUL12/8/201029.4340.113.78%5.22%$5.0153.31%
Wal-MartWMT6/7/201376.3377.942.48%2.52%$2.385.23%

Note: These returns are presented for illustrative purposes only and do not correspond to a real-money portfolio. My objective here is to illustrate the power of rising dividends and the superiority of dividend-paying stocks over bonds as long-term income investments.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.

 

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.