Monthly Dividend Stocks to Snag in 2014

There has always been one major disconnect with dividend stock investing: most of us pay our bills on a monthly cycle, yet our dividend checks arrive only once per quarter.  This can make budgeting a headache and adds an extra level of planning.

Sure, a diversified dividend stock portfolio will be comprised of stocks with payment dates spread across the calendar, but your income stream is still generally going to be lumpy and uneven.  Monthly payment of dividends would be vastly preferable for most investors.

But aside from budgeting concerns, there is another major reason why monthly payment is good for investors: compounding.  If you reinvest your dividends in additional shares rather than use the income for current needs, you compound your wealth significantly faster as the number of shares paying you a dividend rises every single month.   On a $100,000 portfolio, this might amount to a couple hundred bucks over the course of a single year.   But remember, compounding is not linear; it’s exponential.  Over the span of an investing lifetime, those “couple hundred bucks” in any given year can turn into tens of thousands of dollars.  (If you want to see how the math works, check out Accounting Coach.)

Several income-focused mutual funds and closed-end funds do, in fact, pay monthly.  But most are concentrated in low-yielding bonds, and if you’re like me, you prefer to hand pick the best dividend stocks for both income growth and capital appreciation.

There are actually quite a few companies trading today that pay their dividends monthly.  Let’s take a look at some of my favorites.

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 519 consecutive monthly dividends and raised its dividend 73 times—and in 64 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 $2.18 per share.  At its current price, that amounts to a dividend yield of 5.9%.

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 3,800 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.

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

American Capital Realty Properties

Next on the list is one of Realty Income’s upstart competitors, American Capital Realty Properties (ARCP).

I call ARCP an “upstart” due to its short trading history (it’s only been trading since 2011).  But the truth is, after its merger with Cole Properties (COLE), ARCP will be the largest triple-net REIT by market cap, and its total square footage will be nearly double that of Realty Income.  And while ARCP has a short history, its executive team has an average of 20 years experience in the industry.

Because of its shorter trading history, ARCP trades at a decent-sized discount to Realty Income.  Based on its last monthly dividend of $0.078, the REIT sports a dividend yield of 7.5%.  That kind of yield is hard to come by these days unless you’re willing to accept some pretty significant risk.

Writing for Barron’s earlier this month, Vito Racanelli suggested that ARCP was 20%-40% undervalued relative to its peers.  I would agree, but I would also mention that I consider its peers (such as Realty Income) to be attractively priced as well.

If you’re buying the stock for income, capital appreciation is a secondary concern.  Still, no one complains when an income stock ends up generating high capital gains.

Banco Bradesco and Banco Itau

And speaking of income stocks with high capital gains potential, next on the list are Brazilian banking groups Banco Bradesco (BBD) and Banco Itau (ITUB).

It’s a little bit of a stretch to call Bradesco and Itau true “monthly income stocks.”  Yes, both pay dividends monthly, but the monthly dividends are pretty modest (the last monthly dividends were $0.009 and $0.006, respectively).   Much larger dividends are paid semiannually, giving the banks respectable trailing 12-months yields of 4.9% and 3.9%, respectively.  Still, the monthly payout instills discipline in management, and I respect the nod to shareholder friendliness.

2013 has not been a kind year for investors in Latin America and in Brazil in particular.  Most stock averages in the region are down for the year. The Brazilian currency, the real, started 2013 grossly overpriced, and slowing in China has taken the wind out of Brazil’s sails.  But with 2013 now drawing to a close, the real is reasonably priced again, and much of the hot money has fled the region.  If China picks up steam in 2014—and I expect that it will—then I expect the Brazilian economy to come back to life.  And I expect investors to rediscover the region.

Whitestone REIT

Returning to U.S. shores, the next monthly-pay stock is Whitestone REIT (WSR), a smaller REIT that specializes in shopping centers.

I should start by making one point very clear: while I like Whitestone, it is a very different kind of REIT than Realty Income or American Realty Capital Properties.  Its property portfolio is far less geographically diversified (with properties in just three states), and it is a much smaller company by market cap ($290 million).

Still, despite its small size, Whitestone has been inking deals with some heavy hitters of late, including Wal-Mart (WMT).  And with the U.S. economy slowly shifting back into growth mode, Whitestone should decent rent growth going forward in its retail properties.

Whitestone currently yields 8.5%, making it the highest-yielding stock on this list.  Part of this is due to its lack of dividend growth; the stock has paid $0.095 per month since September of 2010.

I’m ok with that.  As investors, we can collect that monthly dime per share indefinitely, reinvesting it to grow our share count.

Student Transportation Inc.

Finally, for an off-the-wall pick, consider picking up shares of Student Transportation (STB), North America’s third-largest operator of school busses.  Student Transportation operates more than 10,000 school busses and transports more than a million students daily across the United States and Canada.

Student Transportation currently yields about 8.4%. This is a riskier play than the others for a couple reasons.  First, because the company has been aggressively expanding in recent years and has all of the expenses associated with rapid expansion, the company has been paying a decent chunk of its dividend from new debt issuance.  This puts the dividend at risk in the event that the capital markets tighten up or if expected growth fails to materialize.

And secondly, a decent chunk of the company’s sales come from Canada, where it is headquartered, so currency risk is also an issue.  I believe there is a good chance that the dollar will rally in 2014 as the Fed scales back its quantitative easing.  This could cause Student Transport’s dividend to fall slightly in U.S. dollar terms.

Still, while a little riskier than some of the other picks, I like Student Transportation as a portfolio diversifier and I believe that its dividend is safe for at least the next several quarters.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long O, ARCP and WMT. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.

This article first appeared on InvestorPlace.

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