Dividend growth investing is a popular strategy for investors looking to generate passive income from their portfolio. The approach is attractive because it allows investors to focus solely on their income stream without being affected by market fluctuations.
This strategy also provides a more stable and less stressful retirement, as investors can avoid using their principal and rely on their dividend payments instead. This eliminates the need to sell stocks during market downturns to cover living expenses.
Investors can streamline their passive income cash flow to match their monthly expenses by purchasing dividend stocks that pay distributions to shareholders every month.
Here we highlight three of our top picks among the wide range of monthly dividend stocks available.
A Dividend Nugget
Fortitude Gold Corp. (FTCO) is a U.S.-based gold producer that derives 99% of its revenue from gold. The company focuses on projects with low operating costs, high returns on capital, and wide margins.
Fortitude Gold’s Nevada Mining Unit contains five high-grade gold properties situated in the Walker Lane Mineral Belt. A very attractive trait of this portfolio is that Nevada is known for being one of the most favorable jurisdictions for miners worldwide. Since Fortitude Gold generates almost all of its revenue from gold, it is highly susceptible to changes in the price of gold.
Fortitude Gold is currently offering a monthly dividend of $0.04, which equates to an annualized dividend yield of ~7.5%. This represents the highest dividend yield among precious metals producers. While Fortitude Gold has a payout ratio of 87%, which is not ideal, it is reasonable given the high-quality nature of its assets. Moreover, the company’s debt-free balance sheet suggests that the dividend is likely to remain secure in the foreseeable future.
Last, but not least, Fortitude Gold has a significant competitive advantage: the high quality nature of the Isabella Pearl Mine. This allows the company to achieve an all-in sustaining cost of approximately $778 per ounce, significantly lower than the global average cost of $1,232 per ounce. Consequently, Fortitude Gold is more profitable than most of its peers at a given gold price and is one of the most resilient gold producers during times of lower gold prices.
‘Experience’ Monthly Income
EPR Properties (EPR) is a real estate investment trust that invests in triple net leases with a focus on entertainment, recreation, and education properties. Furthermore, the company has identified attractive sub-segments within each category. For instance, it invests in movie theaters, ski resorts, and charter schools, among other sub-segments, though it is strategically reducing its education portfolio.
EPR Properties has a competitive advantage due to its focus on experiential properties, which protects it against threats from e-commerce. The company believes that its properties will continue to generate strong traffic, as consumers still desire these experiences. While EPR Properties is not recession-proof, we consider it to be one of the better-managed REITs in our coverage universe for these reasons.
The REIT is showing strong performance in the aftermath of the Covid-19 pandemic, and this trend has continued into 2023. The REIT has established a dominant position in the ownership of movie theaters, recreational facilities, and educational properties, which are relatively small sub-segments of the real estate industry, giving it strength in a niche area with limited institutional investor competition.
However, the continuation of EPR’s positive financial results and portfolio metrics is essential for the company to remain an appealing choice for income investors or those seeking exposure to high-yield REITs. Based on current factors, EPR Properties, currently yielding 8%, seems like a sound option for these types of investors.
An Enticing High-Yield Stock
Dynex Capital (DX) is a U.S.-based mortgage real estate investment trust that invests in mortgage-backed securities (MBS) on a leveraged basis. Its investment portfolio includes agency and non-agency MBS, comprising residential MBS, commercial MBS (CMBS), and CMBS interest-only securities. With a compelling 11.4% yield, Dynex Capital could be an enticing high-yield stock.
Agency MBS comes with a guaranty of principal payment by a U.S. government agency or a government-sponsored entity, such as Fannie Mae and Freddie Mac. Non-Agency MBS do not have such guarantees. Dynex Capital, Inc. was established in 1987 and is headquartered in Glen Allen, Virginia.
The company has an internal management structure, which is generally viewed positively as it reduces the potential for conflicts of interest. Additionally, increasing total equity has no material impact on operating expenses, giving it economies of scale potential.
Dynex Capital’s portfolio is designed to be widely diversified across residential and commercial agency securities. This diversified approach helps the company strike a balance between risk and reward, which has been advantageous over the years. By investing in a mix of CMBS and RMBS securities, the negative effects of prepayments on portfolio returns have been minimized. In addition, agency CMBS provides a buffer against unexpected interest rate volatility.
To limit portfolio volatility, high-quality CMBS IO investments are selected with shorter durations and higher yields. Furthermore, a significant portion of Dynex’s Agency 30-year RMBS fixed rate portfolio is protected against prepayments by restrictions on incentives for refinancing.
Dynex Capital’s high dividend yield and monthly dividend payments are appealing to high-yield dividend investors. However, the company is not generating enough earnings per share to cover its dividend payments. Additionally, the high-risk nature of the business model exposes Dynex to significant losses if the economy enters a recession, leading to a rise in defaults. Considering these factors, the stock is relatively risky and investors should be cautious before buying shares.
Generating monthly passive income through dividends can be a reliable way to improve financial stability and quality of life without getting caught up in the daily volatility of the stock market. While it’s generally recommended to have a well-diversified portfolio, the three monthly dividend stocks highlighted here could serve as a solid foundation, providing a steady stream of income every month.
Additionally, these stocks have the potential for continued growth in their dividend payments over the years, which can be a valuable source of income for investors.
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