Investing for income instead of simply investing for capital return is an increasingly popular strategy in 2017.
For conservative investors who are at or near retirement, the idea of generating regular income via coupon payments from bonds or dividend payments from stocks is particularly appealing. This kind of investment strategy can generate steady cash flow to pay for living expenses. Instead of bleeding down your portfolio or selling off assets at inopportune times in a down market, relying on investment income as a kind of retirement "paycheck" can help you craft a sustainable family budget in your golden years.
Some younger and more growth-oriented investors are also enamored with high-yield investing as well, however. That's because investing in dividend stocks allows tactical traders to "match the expected return of your benchmark and then enhance the portion of that expected return that is certain, which is the dividend, versus the uncertain portion, which is the capital gain," says Keith Elflein, a portfolio manager at Boston Private.
"Over time, you're going to be equally right or wrong against your benchmark with the uncertain portion of capital gains, but you will beat the benchmark" because of guaranteed dividends and income, Elflein says. "If you compound that over time, the idea is it will drive significant outperformance."
[See: 10 Best ETFs for Value Investors.]
As reliance on dividends and income stays strong on Wall Street, then, it's not a surprise to see more investors flocking to monthly dividend stocks -- that is, publicly traded companies that pay distributions to shareholders every month instead of once a quarter, as is typical.
But investors who are eager to get more frequent income from their portfolio need to know what they are buying, and it's important that they know all the facts before investing their hard-earned cash.
All investments, including monthly dividend stocks, come with risk. Jeremy Bryan, portfolio manager at Gradient Investments in Arden Hills, Minnesota, warns that the quality of each investment should always be independently researched before you worry about broader themes.
"Dividend payment frequency tends to be a lower priority consideration for our portfolios," he says. "It is far more important to us to buy high quality companies that generate sufficient cash flow through business operations to not only cover their dividends, but have the opportunity to grow their dividends over time."
Bryan also says a good financial advisor can help create a portfolio that delivers income each month that doesn't require individual investments to pay out every 30 days, among other important steps in your retirement planning.
That said, Bryan does like some monthly payers even if he's ambivalent about these companies as a group.
One he particularly likes is Realty Income Corp. (ticker: O), a real estate investment trust or REIT. Bryant says Realty Income has "a high quality tenant portfolio of companies like Walgreens and FedEx." It also has compound annual dividend growth of almost 5 percent after 79 consecutive quarterly increases in its dividend payout.
Since commercial real estate provides reliable cash flow via rent checks back to Realty Income, the business is tailor-made for monthly dividend distributions.
Monthly dividend stocks cover a narrow part of the market because of cash-flow demands. In fact, real estate companies like Realty Income make up a large chunk of monthly payers with others mostly coming from financial companies that collect regular debt service from borrowers.
A few other popular monthly dividend stocks right now include:
Prospect Capital Corp. ( PSEC), a financial services company that specializes in debt and equity investments in mid-size companies, yields 12.2 percent annually.
Stag Industrial ( STAG), an industrial park operator, yields 5.1 percent annually.
Main Street Capital Corp. ( MAIN), an investment firm that provides financing to middle market companies, yields 5.7 percent annually.
EPR Properties ( EPR), a REIT that leases to specialized tenants such as private schools or waterparks, yields 5.4 percent annually.
Since monthly payers are mostly found in a small slice of the market, Elflein of Boston Private warns that digging too deeply into monthly dividend payers will mean skewing too heavily toward these sectors and sacrificing diversification.
"It's important to balance your exposure across the market in the equities space," he says, adding that's advice everyone should follow regardless of whether you prefer growth stocks or dividend payers.
Still, it's hard to ignore the safety net of monthly payouts. With stocks at all-time highs and with interest rates still historically depressed, it's undeniable that dividend stocks -- be they monthly payers or traditional quarterly payers -- have a big role to play in your portfolio.
"I always hear everyone saying rates are going up, rates [on Treasury bonds] are going up," Elflein says. "But I don't think I've ever heard a solid argument about why, other than 'they have to.' Well, they don't have to -- they've been going down for the better part of 30 years."
In fact, despite the Federal Reserve raising rates three times in just six months, 10-year Treasury notes are yielding under 2.2 percent -- right where they were at the end of 2015, when the Fed executed "liftoff" with its first interest rate increase since 2006.
So while monthly dividend stocks can carry risk, that's true of any income investment.
"Every investor needs yield of some kind," Elflein says, "but there just aren't a lot of sure things out there right now in either the bond or the equity market."
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