If you’re looking to invest $7,000 in monthly income stocks, you don’t have that many options to choose from. Apart from real estate investment trusts (REITs), not very many stocks pay monthly. However, some do — especially small-cap energy stocks and financials. In this article, I’ll share a monthly income stock I would happily buy at today’s price.
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First National Financial
First National Financial (TSX: FN) is a Canadian mortgage lender that operates outside the traditional banking system. It lends money to Canadians who normally wouldn’t qualify for mortgages from banks, such as self-employed people. Such Canadians don’t necessarily have worse credit ratings than anyone else, but banks deny them credit due to their perceived “red flag” characteristics. First National partners with independent mortgage brokers across the country to get these Canadians financing. It’s a business model that has worked out well for FN over the years, with earnings having compounded at a 9.5% compound annual growth rate (CAGR) over the last decade.
Performance
First National Financial has performed pretty well as a business over the years. In the trailing 12-month period, it boasted the following profitability metrics:
- An 87% gross profit margin.
- A 27% net income margin.
- A 27% return on equity.
- A 0.37% return on assets.
The margins here are truly off the charts, as is the return on equity. The return on assets is a little on the low side but has been higher in the past.
Now, when it comes to growth, First National hasn’t been doing as well lately. Its pre-fair market value (FMV) income declined 16%, and earnings declined even more in the trailing 12-month period. However, this is likely a temporary condition. As mentioned previously, FN compounded its earnings at 9.5% CAGR over the last decade. If interest rates stabilize near 2.5%, which appears to be what’s happening, then FN will be able to make more money by issuing more mortgages. That will cause earnings to gradually climb. So, I think the recent decline in pre-FMV income is a temporary condition and that FN will do well long term.
Valuation
Going by multiples, First National stock is pretty cheap — cheaper than the big banks. At today’s price, it trades at the following multiples:
- 11.3 times earnings.
- 3.6 times sales.
- 3.8 times book value.
These are lower multiples than those that FN’s “competitors” (i.e., TSX banks) trade at. So, FN might be undervalued.
Dividend income
Last but not least, FN pays a lot of dividends as a percentage of the share price. The dividend is $0.208334 per month, or $2.50 per year. That provides a 6.34% yield at today’s stock price. If you invest $100,000 in it, you get roughly $6,384 back in annual dividends. Here’s a table showing the math on that:
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| First National | $39.16 | 2,554 | $0.208334 per month ($2.50 per year) | $532.08 per month ($6,384 per year) | Monthly |
Foolish takeaway
The bottom line on First National stock is it’s a high-quality monthly payer that has a very high yield that is quite well covered by earnings. The company’s growth hit a snag this year, but that should turn around eventually. I am considering this stock for an investment right now.
