Monthly dividend stocks are on the rarer side given that most companies pay dividends quarterly. Real estate investment trusts (REITs) are generally strong dividend payers because they are required to pay most of their income as dividends in order to avoid income tax at the corporate level.
Here are two high-yielding REITs that pay monthly dividends and have attractive yields.
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Realty Income Fund is a highly defensive REIT
Realty Income Fund (O 1.29%) is a REIT that focuses on single-tenant real estate. At the end of 2022, the company owned 12,237 properties and had an occupancy rate of 99%. Realty Income's business model uses an unusual lease structure called a triple-net lease. In a triple-net lease the tenant is responsible for most operating expenses, including insurance, taxes, and maintenance in addition to rent. These leases generally have longer terms, contain automatic escalators, and are expensive to break. This means that tenant vetting is paramount and tenants have to have the wherewithal to make it through recessions.
The typical tenant for a Realty Income property is a drug store, dollar store, or convenience store. These business models are highly defensive and are generally resilient during recessions. When the economy struggles, people still buy paper plates and over-the-counter medications.
During the COVID-19 pandemic, Realty Income continued to hike its dividend when most REITs were cutting theirs. It isn't the sort of stock that is is going to double in a short period of time -- it is a conservative stock for an income investor. In fact, Realty Income should be a core holding for an income investor.
Last year, Realty Income earned $3.92 in adjusted funds from operations per share. Its net income was $1.42. The reason for the big difference is that generally accepted accounting principles (GAAP) require companies to deduct depreciation and amortization, and real estate investment trusts have a lot of it.
Since depreciation and amortization is a non-cash charge (you don't write a check for it), net income as reported under GAAP understates the actual cash-flow-generating capacity for the company. At current levels, Realty Income is trading at 15.7 times 2022 adjusted funds from operations per share and has a dividend yield of 4.8%.
AGNC Investment is a bet on the relative performance of mortgages versus Treasuries
AGNC Investment (AGNC 1.72%) is a mortgage REIT with a different business model from Realty Income. While Realty Income invests in actual properties, AGNC Investment owns a portfolio of real estate debt, in other words mortgage-backed securities (MBS). This means that AGNC Investment looks more like a bank or hedge fund than the typical REIT. Most of AGNC Investment's MBS portfolio is guaranteed by the U.S. government, which means that AGNC bears limited credit risk.
Mortgage REITs struggled last year as the Federal Reserve aggressively raised interest rates in order to combat inflation. As a general rule, mortgages don't react well to heightened interest rate volatility. This caused MBS to underperform Treasuries.
Mortgage REITs tend to use interest rate derivatives to hedge their interest rate risk, and this meant that AGNC Investment's portfolio fell faster than Treasuries and the gains on the hedge were insufficient to make up for the losses in the portfolio. This translated into big declines in book value per share in 2022.
At the end of 2022, MBS began to outperform Treasuries and this translated into increased book value per share in the fourth quarter. This underperformance (called "widening MBS spreads") tends to revert to the mean, which implies that MBS should outperform Treasuries for the near term, which will translate into higher book value per share and earnings.
AGNC Investment is one of the only mortgage REITs that has not cut its dividend in late 2022 or early 2023. It pays a $0.12 dividend, which works out to be a 13.8%. The safety of the dividend is based on continued outperformance of MBS versus Treasuries. If spreads start widening again, the dividend could be at risk. If the Federal Reserve begins to wind down its policy of monetary tightening, volatility should decrease, which will help MBS outperform Treasuries.
