The 5 Best Monthly Dividend Stocks To Buy Right Now (Plus 3 Great ETFs) (2024)

(Source: imgflip)

Like many of you, I dream of achieving financially independence with my dividend portfolio. Specifically, that means generating enough safe and passive income to fund a comfortable retirement (when combined with other sources of income like Social Security and pensions).

When it comes to funding living expenses nothing is quite like a monthly dividend stock, that pays dividends on the same schedule as your bills. But the popularity of monthly dividend stocks means that some of Wall Street's higher risk asset classes (like CEFs and BDCs) have adopted this model in hopes of attracting investor capital and the lucrative fees that come with it.

As a result, while the number of monthly dividend stocks may be very high, the number of such equities I can actually recommend for conservative income investors (such as myself) is far more limited. Fortunately, as part of my research at Simply Safe Dividends (where I'm an analyst covering about 200 companies per year), I do know of a handful of quality blue-chip and SWAN (sleep well at night) monthly dividend stocks that are likely to prove a good source of generous, safe and steadily rising income over time.

This article is designed to highlight the best 5 deals in monthly paying blue-chips and SWAN stocks (as defined by my 11 point quality score). It also uses Portfolio Visualizer's backtest and portfolio optimizer software to show why proper portfolio construction is not just an essential part of good risk management, but can also boost your total returns over time with the lowest amount of risk.

How I Built This List

I'm a big fan of Warren Buffett's investing advice including his warning that there are two primary rules to good investing "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."

Minimizing permanent losses of capital by avoiding value/yield traps (who can't sustain safe and growing dividends over time) is thus the first thing income investors should focus on. This is why all my articles follow the maxim "quality first, valuation second, and patience and discipline always."

This is why I've used my 5.5 years of experience as a professional analyst/investment writer to construct a three-factor, 11-point quality score designed to minimize the chances of recommending (or buying) riskier stocks that might not be able to sustain dividends during a recession.

• Dividend safety (1 to 5 points): based on payout ratio, balance sheet, and cash flow stability
• Business model (1 to 3 points): based on disruption risk, ability to sustain returns on investment above cost of capital (accretive growth), long-term growth potential
• Management quality (1 to 3 points): capital allocation track record and long-term dividend friendly corporate culture

This 11-point quality scale can be applied to any dividend stock.

Dividend Sensei Quality Score Classifications

• 3 to 6 points: high to ultra-high risk: avoid no matter the price.
• 7 points: "dirty value", only buy at STEEP discount to fair value (to compensate for higher risk) and limit position size to 1% to 2.5% of the equity portion of a portfolio.
• 8 points: blue-chip, seek to buy a modest discount to fair value or better, and limit to 5% to 10% of the equity portion of a portfolio.
• 9 to 10 points: SWAN stock (higher caliber blue-chip, describes most dividend aristocrats and kings), buy at fair value or better, limit to 5% to 10% of the equity portion of a portfolio.
• 11 points: Super SWAN (as close to a perfect dividend stock as you can find on Wall Street), buy at fair value or better, limit to 5% to 10% of the equity portion of a portfolio.

I personally only recommend (or buy for my retirement portfolio, where I keep 100% of my life savings) level 8 or higher blue-chips and SWAN stocks.

However, you'll note that even for the level 11 quality Super SWANs I still recommend buying only at fair value or better. That's because valuation always matters and overpaying for even the highest quality company can significantly reduce forward returns (and increases the risk of a permanent loss should the thesis break).

This is where my favorite blue-chip valuation method comes in, dividend yield theory or DYT. This compares a stock's yield to its historical yield and assumes that, unless the thesis breaks, the yield will return to its historical norm, which approximates the fair value the market has usually paid for the company.

This is the valuation method asset manager/newsletter published Investment Quality Trends has used exclusively since 1966 (and only on high-quality dividend stocks) to achieve market-beating total returns and with about 10% less volatility to boot.

(Source: Investment Quality Trends)

According to investment newsletter tracker Hulbert Financial Digest, over the last 30 years, IQT's entirely blue-chip DYT driven strategy has resulted in the best risk-adjusted total returns of any newsletter in the country.

In other words, the historical evidence for the superiority of DYT- based blue-chip dividend investing is very strong, which is why I've made it the cornerstone of my own recommendations, portfolio buys and my long-term, valuation-adjusted total return model.

That's based on the Gordon Dividend Growth Model, which has proven relatively effective at estimating long-term dividend stock total returns since 1954. It's what Brookfield Asset Management (BAM) and NextEra Energy (NEE) use as their official total return models.

The GDGM says that over time total returns approximate yield + long-term cash flow/dividend growth. That's because yield represents current income while, assuming a constant payout ratio, dividends grow in-line with cash flow, from which stock prices are ultimately determined. The model assumes that valuations cancel out over time, because of mean reversion.

While over 10+ years valuation changes tend to cancel out, over 5 to 10-year periods (my preferred time horizon, since that tends to neutralize the effects of short-term sentiment and are mostly fundamental driven), valuation shifts can have a significant impact on returns.

I add a valuation boost/drag to the GDGM to get a long-term valuation-adjusted total return potential of yield + long-term cash flow/dividend growth + valuation returning to the historical norm (CAGR over 5 to 10 years). My backtesting of this model, across roughly two dozen blue-chip stocks and ETFs, has found that it has a historical margin of error of 20% (which is actually very good for long-term forecasting models).

For example, say a dividend blue-chip historically pays 4% but today yields 5%. This means that it's about 20% undervalued and the share price would have to rise 25% to get back to its historical fair value. While the market can remain bearish on stocks for very long stretches of time (the most I've seen is 6-year bear markets) ultimately stock prices are always a function of fundamentals (specifically earnings and cash flow).

That's because, in the words of Benjamin Graham, Buffett's mentor, the father of value investing and the 3rd greatest investor of all time (about 20% CAGR total returns from 1934 to 1956 vs market's 12%):

"In the short run, the market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company." - Benjamin Graham

If that stock has grown cash flow at 5% historically and is expected to continue to do so then its valuation-adjusted return potential is 5% yield + 5% cash flow/dividend growth + 2.5% to 5% valuation boost (depending on how long it takes) = 12.5% to 15% (10% to 18% including margin of error).

That's compared to the market's historical 9.1% CAGR and 8% that the S&P 500 is likely to deliver in the coming 5 to 10 years, assuming historical earnings growth and factoring in today's valuation.

So now that you understand how I build these watchlists, let's take a look at the 5 best monthly dividends stocks you can buy today.

The Best 5 Monthly Dividend Stocks You Can Buy Today

Because of the small universe of blue-chip monthly dividend stocks (just six companies in total qualify as level 8 or higher on my quality score), not all of these companies are great buys today.

(Source: Simply Safe Dividends, F.A.S.T Graphs, Morningstar, management guidance, Gordon Dividend Growth Model, Dividend Yield Theory, Moneychimp, analyst estimates)

I've ranked them by discount to historical fair value as determined by dividend yield theory (using their 5-year average yields on regular dividends). As you can see LTC is the sole monthly paying blue-chip that is trading at a discount to fair value, PBA is trading exactly at fair value and MAIN and EPR are trading at slight premiums.

But since no valuation method is perfect (all investing is probabilistic) I can still recommend adding to or initiating a position in MAIN and EPR at today's prices. Realty Income on the other hand, at an 18% premium to historical fair value, is just too rich to recommend. It's a "hold" for current investors and worth watchlisting.

While Realty is unquestionably the highest quality monthly dividend stock (and the only dividend aristocrat, with 25 consecutive years of dividend raises to its name) it's likely to deliver about 6% CAGR total returns over the next 5 to 10 years. That's not horrible, but my total return model estimates the S&P 500 will provide about 8% and most asset managers, according to Morningstar's 2019 long-term forward return survey, expect 1% to 7% from the broader market.

Asset Manager 5 to 10-Year Stock Market Forward Return Expectations

(Source: Morningstar Asset Manager Survey)

If those asset manager models are correct, then all 5 of these monthly dividend stocks are likely to outperform the market, even Realty. But just because the consensus is for roughly 4% CAGR market total returns doesn't mean that investors should necessarily overpay for Realty and settle for 6% returns. Not when watchlisting it and patiently waiting for a return to fair value can result in far superior results.

Remember that "there is no alternative" or "fear of missing out" are not good long-term strategies and you should never put your hard-earned money into suboptimal investments. Not when, no matter how hot the market gets, something great is always on sale.

I personally try to put my weekly stock buys into blue-chip dividend growth stocks that are trading at March 2009 style valuations (low double-digit or single-digit forward PE and price/cash flow) and have never had trouble finding plenty of such opportunities. That's the benefit of having an extensive watchlist of quality companies that you can screen via several time-tested valuation methods.

But while LTC, Main Street, EPR and PBA are the best monthly stocks I can recommend buying right now, there is more to good investment returns than just knowing what to buy and when.

Don't Forget The Importance Of Portfolio Construction And Asset Allocation

Portfolio Visualizer is a great free tool for testing investing strategies via backtests (as far back as 1985) and optimizing your portfolio based on certain goals. The biggest limitation of the software is that you can only backtest as far back as the IPO of your youngest stock/ETF/mutual fund.

For example, let's say you wanted to invest 20% equally into all 5 of these monthly dividend blue-chips. In that case, the backtest data only goes back to January 2011. However, an equally weighted portfolio of LTC, PBA, MAIN, EPR, and O would have done very well over the past 8 years.

(Source: Portfolio Visualizer)

These 5 monthly paying blue-chips have spent most of that time outperforming the market.

(Source: Portfolio Visualizer)

But more importantly for conservative investors (like retirees living off the 4% rule), this portfolio was 44% less volatile than the S&P 500 over this time period. Not just did it outperform the market by 16% annually, but it did so with a much smaller peak decline (drawdown) and achieved a 6% better Sortino ratio.

The Sortino Ratio is what I consider the best risk-adjusted return metric to use because it measures excess total returns (relative to risk-free returns such as 10-year US treasuries) divided by negative volatility (the kind investors fear). Think of the Sortino as the "reward/risk" ratio.

These 5 stocks, equally weighted back in 2011 would have delivered 1.69% total returns per 1% of negative volatility.

However, it's important to remember that all my recommendations are purely meant for the equity portion of your portfolio. If you can truly stomach the inherent volatility of stocks, and your savings rate and or portfolio is large enough to live off safe and growing dividends alone, then being 100% in stocks is okay (100% stocks is my optimal asset allocation for this reason).

However, most people can't actually tolerate a 100% pure stock portfolio, and during inevitable bear markets end up panic selling, locking in unnecessary losses.

Which is why, according to JPMorgan Asset Management, over the last 20 years, which have seen two 50+% market crashes, the average investor's return was just 1.9% CAGR. That's worse than buying and holding any other asset class or even historically mild inflation.

In other words, for 20 years the biggest risk to achieving your retirement goals wasn't market volatility, but market timing created by improper asset allocation (mix of stocks/cash/bonds you own) scaring you out of what you own at the worst possible time. Note that even an ultra-conservative 60% bond/40% stock portfolio managed to drastically outperform the typical investor, while still enjoying 89% of the total returns of a 100% S&P 500 portfolio.

Portfolio Visualizer's most useful feature, in my opinion, is the ability to optimize a portfolio. It uses historical data (going as far back as 1985) to weight your holdings (stocks, ETFs, mutual funds) to achieve several goals (such as minimizing volatility or maximizing risk-adjusted returns).

My favorite optimization setting is achieving a target return while minimizing peak drawdowns (the thing that most scares investors into panic selling).

This essentially lets you think like a pension fund manager. First, you determine what kind of returns you need (based on your time horizon and saving rate) to be able to fund your long-term goals. Then you can use this optimizer feature to determine what historical asset allocation/portfolio weighting can get you that target return with the smallest peak short-term loss (and thus most likely to let you stick to the strategy rather than panic sell at a loss).

Of course, past performance isn't a guarantee of future returns, so this backtest based optimization isn't a 100% guarantee to give you a perfect portfolio. But it's a good way of achieving a reasonable asset allocation that is most likely to help you reach your long-term financial goals.

For most people bond ETFs are the best option for fixed income because it outsources the need to study individual bonds to experts and gives you instant diversification. For the following examples, I use 3 good bond low-cost bond ETFs.

• Invesco Ultra Short Duration ETF (GSY): 2.6% yield (monthly payout), 0.25% expense ratio (cash equivalent)
• Vanguard Total Bond Market ETF (BND): 2.8% yield (monthly payout), 0.04% expense ratio - Morningstar 4 star silver rated ETF
• SPDR Portfolio Long Term Treasury ETF (SPTL): 2.6% yield (monthly payout), 0.06% expense ratio

As a happy coincidence, all three of these bond ETFs also pay monthly dividends. Thus, the following portfolios are 100% monthly payers.

Why these three bond ETFs? Well, I'm not saying these three are the best bond ETFs you can own. But they are good low-cost options and alternative bond ETFs basically have similar costs and do the same thing.

The reason for owning them is as a cash equivalent (for money you'll need soon), to smooth out your portfolio's returns, or even hedge against corrections/bear markets. Here's what I mean.

(Source: Portfolio Visualizer) - data from January 2009 to May 2019

Ultra-short-term bonds are meant to be a cash equivalent, meaning they tend to have very low rate sensitivity and thus trade flat as a pancake most of the time. Rather than park your money in a checking account that pays essentially nothing (and thus see your purchasing power reduced by inflation), these ETFs pay you enough to mostly or entirely offset inflation.

GSY is a low-cost ultra-short-term bond ETF with a low expense ratio that has indeed delivered on the goals of a cash equivalent. Over the past 10 years, it's traded basically flat, with volatility about seven times lower than the S&P 500. The Sortino (Reward/Risk) ratio is a staggering 6.0, almost four times that of the S&P 500. But obviously, the actual 1.2% CAGR total return isn't sufficient to put all your money in this (you can't pay the bills with risk-adjusted returns).

(Source: Portfolio Visualizer) - data from January 2008 to May 2019

BND is a great choice for those looking for exposure to the entire US bond market (the investment grade part of it). As you can see, the 11-year beta relative to the S&P 500 is basically zero, which is what you want when it comes to asset diversification (low correlation to other assets you own like stocks).

BND has delivered 3.6% CAGR long-term returns but its peak decline, even including the Great Recession was just 4%, 12 times smaller than the S&P 500's. That explains why its reward/risk ratio is 106% greater than the stock markets.

But while GSY is a great cash equivalent and BND a solid choice for exposure to the US bond market, SPTL is the best option when it comes to low-risk hedging against inevitable market declines.

Risk-free US treasuries tend to appreciate or at least remain stable (like T-bills) during market crashes. Longer duration bonds appreciate in value as interest rates fall (their duration is very large, creating significant upside potential during panics).

SPTL is a solid long-term US Treasury ETF that happens to be old enough to backtest the entire Great Recession, which the worst-case market meltdown scenario so many investors fear.

(Source: Portfolio Visualizer) - data from January 2008 to May 2019

Despite having -0.31 correlation to the S&P 500, SPTL has actually managed to nearly match the S&P 500 over the past 11 years. However, that's not because it's a good alternative to stocks in general but merely served as a great hedge during the second worst US market crash in history.

SPTL Annual Returns Vs S&P 500 Since 2008

(Source: Portfolio Visualizer) - data from January 2008 to May 2019

You can clearly see the countercyclical nature of long-duration US treasuries by comparing SPTL's annual return to the S&P 500 over the past 11 years. When the market is scared (in a "risk-off" environment) long bonds shine.

But note 2013's relatively large decline (-12.3%) created by the "Taper tantrum" caused by the Fed ending its QE bond buying and stronger economic growth (causing bond yields to rise and bond prices to fall). That's the downside to long bonds, high-interest rate sensitivity.

(Source: Portfolio Visualizer) - data from January 2008 to May 2019

Still, the massive decline during the Great Recession meant that the tortoise-like SPTL managed to stay ahead of the S&P 500's hare like sprint during the longest bull market in US history. It took until 2014 for stocks to catch up to long bonds, but as long as we avoid another mega-crash they should retain their historically superior total returns over bonds.

But as far as hands off and low-cost ways to hedge your portfolio, I consider SPTL to be a great choice and far preferable to high priced hedge funds (that can charge horrendous fees for historically lackluster returns and which only very wealthy investors have access to).

Okay, so now that we understand why these 3 bond ETFs are a good choice as far as cash/bond allocations go, let's see what the best allocation of LTC, PBA, MAIN, EPR, and O, plus cash/bonds, would have achieved the kinds of returns conservative investors are looking for.

Let's model 3 kinds of investors.

• Those looking for 5.2% long-term returns (what a standard 60% stock/40% bond portfolio delivered over the past 20 years).
• Those looking for a conservative pension like 7% annual returns.
• Those looking to match the market's historical 9.1% CAGR total returns.

Let's assume you want to minimize drawdowns, to maximize your ability to sleep well at night during volatile and scary periods in the stock market.

Ideal Asset Allocation (Since January 2011) To Achieve 5.2% CAGR Total Return With Minimal Declines

(Source: Portfolio Visualizer)

The very modest goals of this hypothetical investor (plus the longest bull market in US history) mean that he/she would have been able to stick to an ultra-conservative cash heavy allocation of nearly 80%. In fact, over the past 8 years, you could have been just 22.5% in MAIN, EPR, and O, and achieved 5.2% CAGR total returns.

(Source: Portfolio Visualizer) - data from January 2011 to May 2019

This ultra-conservative portfolio would have achieved its goals of matching a standard 60/40 stock/bond portfolio's 20-year CAGR returns but with a peak drawdown that was 8 times smaller than the S&P 500's. That's courtesy of a low beta of 0.57 and a reward/risk ratio that was 55% better than the markets.

But while 5.2% returns might be OK for investors with large portfolios, most of us need to be more aggressive. So let's take a look at what kind of asset allocation would have been best for achieving conservative pension fund like 7% returns.

Ideal Asset Allocation (Since January 2011) To Achieve 7.0% CAGR Total Return With Minimal Declines

(Source: Portfolio Visualizer)

A pension fund targeting 7% returns using these eight monthly dividend stocks and bond ETFs would have needed the following allocation to achieve that (note that achieving future returns of 7% is likely to require a more aggressive allocation, see the final example).

(Source: Portfolio Visualizer) - data from January 2011 to May 2019

This portfolio had roughly the same beta as the more conservative one, but its slightly heavier stock allocation resulted in a peak decline of 3.2% and the worst single year's returns were 0.9%. The reward/risk ratio was 44% better than a pure S&P 500 portfolio.

But I know what you're thinking. "The longest bull market in history means that such conservative portfolios aren't likely to deliver sufficient returns in the future." You're likely right which is why I consider the 9.1% target return option the best example allocation for most conservative investors. I think it's it has the best chance of achieving about 7% returns in the coming years.

Ideal Asset Allocation (Since January 2011) To Achieve 9.1% CAGR Total Return With Minimal Declines (What's most likely to work best for most people)

(Source: Portfolio Visualizer)

(Source: Portfolio Visualizer) - data from January 2011 to May 2019

The more aggressive allocation of this portfolio still delivered low volatility (beta 0.55) but managed to avoid big declines (peak drawdown just 4.5%) and still delivered good returns and a reward/risk ratio that was 36% better than the S&P 500's.

But it's important to remember that the red hot market of the past decade is largely why investors could have been so heavily in cash and still enjoyed these kinds of historically great returns.

Based on the current valuations of the five monthly dividend stocks highlighted in this article, achieving about 9% total returns over the next decade would likely require a near 100% stock allocation, which isn't appropriate for most conservative income investors.

Bottom Line: Realty Income Is Overvalued, But LTC, PBA, MAIN and EPR Are Good to Decent Buys At Today's Prices

Monthly dividend stocks are a great way to cover expenses but you should never sacrifice quality (especially dividend safety) for a monthly payout. Fortunately, there are a handful of blue-chip and SWAN monthly dividend stocks that I consider trustworthy enough for conservative income investors.

LTC Properties, Pembina Pipelines, Main Street Capital, EPR Properties, and Realty Income are the best five based on current valuation. However, Realty's rich price means it's merely a "hold" for current investors and should be watchlisted for future purchases.

And don't forget that stock selection is just one part of a comprehensive investing strategy. Portfolio construction (including diversification for risk management) and asset allocation is actually more important.

Portfolio Visualizer is a great free tool (the best I've yet found) for improving your long-term returns by optimizing your portfolio weightings. This can help combine the right companies with the optimal weightings and asset allocation (such as bond weightings). This can help you maximize the chance of achieving sufficiently strong total returns to meet your needs while minimizing volatility and drawdowns that might cause you to lose sleep at night and panic sell during inevitable future market declines.

Rather than try to reach for the highest possible returns focus on what's likely to work best for your individual needs. Because as Benjamin Graham famously wrote in his seminal book "The Intelligent Investor":

“The best way to measure your investing success is not by whether you’re beating the market, but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” - Benjamin Graham

Dividend Sensei

Dividend Sensei (Adam Galas) is an Army veteran and stock analyst with 20+ years of market experience.

He is a founding author of the investing group The Dividend Kings which focuses on helping investors safeguard and grow their money in all market conditions through the highest-quality dividend investments. Dividend Sensei and the team of analysts (Brad Thomas, Justin Law, Nicholas Ward, Chuck Carnevale, and Sebastian Wolf) help members invest more intelligently in dividend stocks. Features include: 13 model portfolios, buy ideas, company research reports, and a thriving chat community for readers looking to learn how to invest more intelligently in dividend stocks. Learn more.