Monthly Dividend Stocks Are Manipulating You

Income investors, recognizing how much the joy of a stable cash flow can improve their lives, often press their luck in trying to find the point at which point you can have too much of a good thing.

There are two areas where the abandonment of common sense can get an income investor into trouble: (1) one, if he ignores warning signs about a potential investment’s current profitability and outlook in search of dividend yields that are above 5%, or (2) he is drawn to the idea that he can better regulate his lifestyle and investing desires by loading up on stocks that make a monthly deposit into one’s bank account each month.

The problem with investing in stocks that pay dividends monthly is that, more often than not, the lure of dividends is being used as an enticement to prop up the share price of a stock that would otherwise have no appeal to you.

There is no comprehensive data list of the stock performance of monthly dividend payers, so I decided to take a crack at it by aggregating the performance of the 28 largest monthly dividend payers over the past fifteen years (I chose 15 years because I wanted a sufficiently long-time frame that would incorporate the recession of 2008-2009).

The monthly payers that were part of my study were as follows: AGNC Investment, Apple Hospitality REIT, Chatham Lodging, Corus Aviation, Crius Energy Trust, Cross Timbers Royalty Trust, Dream Global REIT, Dream Office REIT, EPR Properties, Enerplus, Gladstone Investment Corp., Granite REIT, Harvest Capital, Hugoton Royalty Trust, LTC Properties, Main Street Capital, Orchard Island Capital, Realty Income, Pembina Pipeline, Prospect Capital Corp., Sabine Royalty Trust, Shaw Communications, San Juan Royalty Basin Trust, Stag Industrial, Student Transportation, Superior Plus, Vermilion Energy, and Whitestone REIT.

From 2003 through 2018, this collection of stocks offered total returns of 6.2% annualized, underperforming the market by three percentage points annually. If you invested $10,000 into an index that was evenly distributed amongst these monthly dividend stocks, you would have ended up with $25,284.48 at the end of the fifteen-year period. If you had simply sat put and invested in the S&P 500 Index over that time, you would have $39,540.36 at the end of the measuring period.

The scariest part is that some novice investors may not realize that the term “Royalty Trust” in the name of a holding is often a signal that the company is a liquidation trust--i.e. The San Juan Royalty Trust is a depletion trust has a leasehold interest in oil and natural gas in New Mexico’s San Juan Basin that will dissolve upon the end of the lease and leave its owners with a value of zero at the end.

Other monthly payers, like Student Transportation, have taken on mountains of debt to maintain its monthly payout, to the detriment of the firm’s long-term health (it would not surprise me if the next recession brought about heavily negative consequences for the firm, such as share dilution or even a 1-in-4 chance of bankruptcy).

Of these 28 monthly paying stocks, 17 of them cut their dividend during the 2008-2009 recession. To call this income “reliable” is a gross abuse of the term. When the economy is all right or booming, the monthly dividends will come. When the economy nosedives into a recession, monthly payers are at a high risk of cut based on history and business model (i.e. the average dividend payout ratio for these 28 companies was 84% in 2018, suggesting little room to maintain the dividend in the event that earnings suffer).

For 25 of the 28 companies listed, the CEO and management team receive compensation that is tied to the price of the stock. My belief is that, in part, these management teams made the calculation that the stock price would be higher if they can brand themselves to investors (retirees especially) as companies that can supplement your lifestyle by sending you cash each month.

This gimmick artificially increases the number of investors that might be interested in the stock because some people think something like “Hey, I can get a 6% dividend yield, and it’s been running for a few years now, so it’s probably fine” while engaging in willful ignorance of the underlying investment.

It is perfectly fine and well to invest in a high-quality cash-generating asset that happens to produce a monthly dividend. Investors get in trouble when they reverse the process by deciding that they want to own stocks that pay them dividends every month and then talk themselves into believing that the investment is of high quality.

Your capital matters. Collecting 20% in cash payouts only to lose 40% in the value of your investments is not particularly wise nor is it smart. As a class, monthly dividend payers underperform the S&P 500 and tend to have a 1-in-2 chance of cutting their dividend payouts during a recession (thus making it unreasonable to truly rely on these payouts). A few, like Realty Income, are excellent. The rest is, by and large, is junk covered in glitter that are preying on emotionalism among income investors to temporarily prop up the stock price.