#$arcp

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 we have 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 given the fund's flexible mandate, 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 listed diviend safety as a critical criteria at the beginning of this article, and I would repeat that here. 

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. I don't take that risk lightly. But I also want to keep it in perspective. I would expect any cut to be in the range of 5%-10% at most, which would put ARCP's dividend more in line with its adjusted funds from operations.

ARCP is definitely a little riskier than the rest of the stocks covered in this article, but at current prices I consider it well worth the risk. It's hard to argue with buying a high-quality portfolio of real estate at liquidation value.

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.