If you’re investing for income, you probably want that income to hit your bank account as smoothly and as frequently as possible so that you can plan your expenditures with a relative degree of confidence. A roller-coaster ride of highs and lows in your bank balance would make it more difficult to pay bills on time, unless you are extremely good at sticking to a rigid budget.
To that end, it would be prudent to invest in companies so that your dividend distributions fall approximately evenly across the quarter. If all of your companies pay in one month, with none during the other two months, you haven’t achieved your goal of continuity.
I recently read an article on Seeking Alpha that discusses five companies that pay their distributions monthly. All of these companies yield over 4%, as well, which makes them especially attractive to income investors. Four of these companies are actually REITs, while one is not.
In this article, I will examine those five companies based on my own system, and see whether or not I believe they are worth buying at this point.
In my examination, I review companies based on seven different criteria: yield, number of years paying and raising dividends, five-year Dividend Growth Rate (DGR), five-year projected Earnings Growth Rate (EGR), total return for the past twelve months, PE, and payout ratio. I feel that this selection covers the past dividend-paying history, the potential future earnings growth, and the valuation of the company.
I constructed a rating system that awards points for each of the previous named criteria. A “perfect” score would be 28 points, with four points awarded in all seven categories. I used this system to select 10 companies for what I call my Perfect Dividend Portfolio.
The first company is LTC Properties Inc (NYSE:LTC), a REIT that focuses on the senior market. The article cites the trust’s strong fundamentals, solid balance sheet, and 4% distribution.
The trust is currently trading at approximately $48 and yields 3.90%. It has paid dividends since 1992, but froze the dividend from 2008 to 2009, so its history of raising dividends is only 4 years. The five-year DGR is 3.6% and the total twelve-month return is 55.8%.
Other metrics that I use when calculating a rating for a dividend company include analysts’ five-year annual growth estimate (5.6%) and the company’s PE (30.6).
LTC Properties Inc (NYSE:LTC)’s dividend-payout ratio seems unreasonably high, at 117%. Of course, REITs are different from other dividend-paying companies, in that the trust by law must pass through at least 90% of their taxable income to the trust owners. This can skew the payout ratio when it is derived from earnings, so the better comparison is the payout based on FFO (Funds From Operations), which is a more reasonable 75%.
LTC Properties Inc (NYSE:LTC) scores an 11 on my ratings system. Yes, its stock price has had an impressive run over the past twelve months and its monthly distribution is attractive, but I don’t think that obtaining the consistency of the monthly payment is worth giving up the other factors that I feel are important.
The second company is Realty Income Corp (NYSE:O) , another REIT, which I have examined before. It’s one of the more popular REITs, and has been consistently raising its distribution for 15 years, which makes it eligible for inclusion in my portfolio. The trust has been paying dividends for a total of 44 years. The share price is up 45% in the past twelve months.
Realty Income Corp (NYSE:O) is currently trading at approximately $55 and yields 3.60%. The five-year DGR is 3.6% and the total twelve-month return is 49.5%.
Other metrics include analysts’ five-year annual growth estimate (1.2%) and the company’s PE (25.1). The payout ratio based on FFO is 92%.