Every month, the stock market tells a different story, from bullish January to bearish March. What surprises does May 2023 behold? You can protect your portfolio from these monthly stock market surprises by investing in stocks with fixed monthly payouts.
Which dividend stocks have monthly payouts?
Real estate investment trusts (REITs) give monthly payouts as they transfer a significant portion of their rental income as distributions. You can be sure of the payouts as a trust, by definition, distributes its income to shareholders. In return, the trust enjoys special tax treatment.
But even REITs have risks of distribution cuts if their rental income falls and expenses increase. Put yourself in the landlord’s shoes and think about the risk that could affect a REIT’s income.
- Vacant property (occupancy rate)
- Falling property prices (fair market value of investment)
- Rising mortgage payments (interest rate expense)
These three factors can reduce REIT’s cash flows. If they maintain their dividends, then their payout ratio rises. A REIT may handle a 100% payout ratio in a quarter or a year. But if high payouts continue for the second year, there is a higher probability of a dividend cut. That is what happened with True North Commercial REIT. Its occupancy rate fell from 96% in 2021 to 93% in 2022, while rising interest rates increased its mortgage interest costs. The REIT had to halve its distributions to save cash to service its mortgage.
But the below two stocks are unlikely to slash dividends. Instead, they can maintain their current monthly payouts even in a recession.
Choice Properties REIT
Choice Properties REIT (TSX: CHP.UN) is a large retail REIT with 703 properties across various Canadian provinces. Its strength is its essential store tenant base. The REIT earns 57% of its rent from Loblaw, with which it has a 6.2-year lease.
Other than Loblaw, Choice Properties tenants include grocery, pharmacy, and other essential retail businesses like banks. These are resilient companies that can withstand a recession. With such a high-net-worth tenant base, Choice has maintained its occupancy ratio above 97%, at 97.7% in the first quarter. Only 4% of the leases are expiring this year. There is a high probability of these leases getting renewed.
Choice Properties’ first-quarter net income fell 30% year over year as declining property prices decreased the fair value gains recognized on investment properties. While the REIT cannot control property prices, it offset rising interest expenses with higher interest income and improved net operating income from the same asset.
Choice Properties’ payout ratio reduced to 81.8% from 83.3% in the previous year’s quarter. It is a healthy payout ratio that gives the REIT enough cash to service its debt. Choice has been paying regular monthly distributions since 2017 and growing them in a few instances. The REIT also paid a special distribution in 2019 and 2020. Now is a good time to buy the stock and lock in a 5.03% dividend yield.
First National Financial stock
First National Financial Corporation (TSX: FN) gives mortgages to individuals and businesses. It has $131 billion in mortgages under administration (MUA). These MUAs help the lender earn net interest income and servicing fees. In 2022, First National Financial’s revenue and net income increased 13% and 2%, respectively, as higher interest income offset weakness in new loan originations. The lender expects a strong mortgage renewal rate at a higher interest rate throughout the year, which could increase its net interest income.
On the dividend front, First National Financial has increased its dividends in 15 out of 17 dividend-paying years. The stock has been hovering in the $37-$40 price range, creating an opportunity to lock in a more than 6% dividend yield.
Dividend investing tip
The right way to invest in dividend stocks is through small monthly investments. If you divide a $500 investment equally between the two stocks, you can lock in a 5.4% annual dividend yield.
