Dividend stocks are a great way to generate income on your investments. However, most dividend stocks only make payments once a quarter. Some only pay their dividend semi-annually and others only pay their dividend once a year. This can result in a very flat income stream.
If you want consistent monthly income, only a handful of companies will pay their dividend each month. This means that finding one of these companies trading at a fair price is a real gem for income investors. Two companies may meet these narrow criteria and are worth a closer look for investors interested in monthly income: Real estate income (NYSE:O) And SL Green Real Estate (NYSE:SLG).
1. Real estate income
Realty Income prides itself on paying a monthly dividend – even going so far as to call itself a “monthly dividend company.” The real estate investment trust, or REIT, has managed to increase that monthly dividend 123 times since going public in 1994. Its most recent dividend increase brought the annualized dividend to $3.072 per share.
Realty Income has built a portfolio of properties and filled it with tenants that have been able to weather many economic downturns. All of its top 20 tenants fall into at least one of the following categories: non-discretionary, low-cost, service-oriented or non-retail. This makes them much more resilient than high-end luxury retailers, which could experience declining sales during a recession.
As a result, Realty Income’s occupancy rate remains consistently high. It managed to fill 98.8% of its units in the third quarter. Its long-term leases also guarantee the maintenance of this high occupancy rate. The average lease still has about 10 years left.
The downside to Realty Income’s strategy is that it means slow, steady growth. Rents only increase by one or two percentage points per year. As such, its main form of growth is through acquisitions. His most recent, Real Estate Spiritwill cost more than $9 billion, but will add 2,000 new properties with a similar tenant profile to Realty Income’s existing clients.
Management expects the acquisition of Spirit Realty to help it increase its adjusted funds from operations (AFFO) by 4% to 5% next year. That puts its stock price at about 13.7 times next year’s AFFO outlook. That’s a more than fair price to pay for a company with consistently growing earnings and free cash flow, as well as Realty Income’s dividend track record.
2. SL Green
SL Green is also a REIT and the largest office owner in Manhattan. It has interests in 59 different buildings totaling 32.5 million square feet of space.
This was a great position before the pandemic. But the rise of remote working amid the COVID-19 pandemic and the subsequent rise in interest rates have worked against SL Green in recent years. Occupancy rates fell from 96% at the end of 2019 to less than 90% by mid-2023.
Management has worked to reposition itself over the past few years. She sold several non-core properties and refocused on increasing rentals. She had to accept lower rates, but these rates remain profitable. It is finally starting to bear the fruits of its labor, since occupancy rates increased by a tenth of a percentage point in the third quarter.
Unfortunately, these measures were not enough to save SL Green’s dividend. Management cut the dividend for the second consecutive year in December. It now pays an annual dividend of $3, or $0.25 per month.
The good news for investors is that the worst is probably over for the company. As mentioned, occupancy rates are starting to improve. Asset sales help shore up cash flow and pay down debt, including the recent sale of 625 Madison Avenue. And the interest rate cuts expected in 2024 should help reduce the cost of its debt and improve its acquisition potential.
Guided management for 2024 funds from operations between $4.90 and $5.20 per share. Shares are trading at around 9 times that amount, which is a big jump in valuation from where it was just a few months ago. But with the interest rate outlook improving, it might be worth taking a small position in riskier dividend stocks.
Should you invest $1,000 in real estate income right now?
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2 Stocks That Cut You a Check Every Month was originally published by The Motley Fool