Dividend stocks are a great way to generate income from your investments. However, most dividend stocks only provide payouts once a quarter. Some pay only semi-annually, and others pay their dividend just once per year. That can result in a very lumpy stream of income.
If you want consistent monthly income, just a handful of companies will pay out their dividend every month. That means finding one of those companies trading at a fair price is an absolute gem for income investors. Two companies can meet those narrow criteria and are worth a closer look for investors interested in monthly income: Realty Income (O 1.03%) and SL Green Realty (SLG 2.35%).
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1. Realty Income
Realty Income prides itself on paying a monthly dividend -- even going so far as to itself "the monthly dividend company." The real estate investment trust, or REIT, has managed to raise 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 them with tenants that have been able to weather numerous economic downturns. All of its top 20 tenants fall into at least one of the following categories: Non-discretionary, low price point, service-oriented, or non-retail. That makes them far more resilient than something like high-end luxury retailers, which may see a downturn in sales amid 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 ensure it'll maintain that high occupancy rate. The average lease still has about 10 years left.
The downside of Realty Income's strategy is that it means growth is slow and steady. Rents increase just a percentage point or two per year. As such, its main form of growth is through acquisitions. Its most recent one, Spirit Realty, will cost more than $9 billion, but add 2,000 new properties with a similar tenant profile to Realty Income's existing clients.
Management expects that Spirit Realty acquisition to help it grow adjusted funds from operations (AFFO) by 4% to 5% next year. That puts its share price around 13.7 times next year's AFFO outlook. That's a more than fair price to pay for a company with consistently growing profits and free cash flow, and with the dividend track record of Realty Income.
2. SL Green
SL Green is also a REIT and it is the largest owner of office space in Manhattan. It has interest in 59 different buildings totaling 32.5 million square feet of space.
That was a great position to be in pre-pandemic. But the rise of remote work amid the COVID-19 pandemic and the subsequent hike in interest rates all worked against SL Green over the last few years. Occupancy rates fell from 96% at the end of 2019 to below 90% by mid-year 2023.
Management worked to reposition itself over the last few years. It sold off several non-core properties, refocusing on increasing tenancy. It's had to accept lower rates, but those rates remain profitable. It's finally starting to see the fruits of its labor, as occupancy rates crept up by a tenth of a percentage point in the third quarter.
Unfortunately, those moves haven't been enough to spare SL Green's dividend. Management cut the dividend for the second year in a row in December. It now pays an annual dividend of $3, $0.25 per month.
The good news for investors is that the worst is likely over for the company. As mentioned, occupancy rates are starting to improve. Asset sales are helping shore up cash and pay down debt, including the recent sale of 625 Madison Avenue. And expected interest rate cuts in 2024 should help lower its cost of debt and improve its acquisition potential.
Management guided for 2024 funds from operations between $4.90 and $5.20 per share. The shares trade for around 9 times that amount, which is a big jump in valuation from where it was just a few months ago. But with the improved interest rate outlook, it could be worth picking up a small position in the riskier dividend stock.
Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
