Many investors own equities in order to generate reliable income in an environment where treasuries and other fixed-income investments do not offer attractive yields.
Stocks that offer monthly dividends can be especially attractive for income generation purposes, as that allows for more regular reinvesting for those that do not need the income now. Those that want to live off their dividends benefit from very regular, non-fluctuating proceeds on a month-to-month basis. In this article, we'll highlight the top three of the monthly dividend stocks from our coverage universe.
1: Orchid Island Capital
Orchid Island Capital (ORC) is a mortgage real estate investment trust (mREIT). The company is valued at $600 million today, trading for slightly above $3 per share. Orchid Island Capital is externally managed, by Bimini Advisors. Generally, externally managed REITs are somewhat inferior compared to internally managed REITs due to a less competitive cost structure. But at the right price, externally managed REITs can still be a strong investment.
Orchid Island Capital primarily invests in residential mortgage-backed securities, or RMBSs. This business has been quite profitable for Orchid Island in the recent past. During the most recent quarter, ORC generated net profits of $26 million, or more than $100 million on an annualized level.
The company is sharing these strong profits with its owners. The current dividend stands at $0.045 per share per quarter. This makes for a dividend yield of 16% at the current share price. It should be noted that the dividend was reduced by 18% in March, prior to that, the dividend stood at $0.055 per month.
Dividend reductions generally aren't positive, but since the yield is still very high, investors buying at current prices will likely still be happy with the result. In fact, even if Orchid Island Capital were to cut its dividend by another 18%, the dividend yield would still be pretty high, at 13%.
We do not expect meaningful earnings growth from Orchid Island Capital. A flattening yield curve generally puts pressure on the earnings growth of mREITs, and in 2022 yield curves have compressed meaningfully so far. But even without any earnings growth, Orchid Island Capital could generate compelling total returns, thanks to its high dividend yield.
Between some book value growth, some multiple compression, and its 16% dividend yield, we believe that Orchid Island Capital could easily deliver double-digit returns going forward.
2: AGNC Investment Corp.
AGNC Investment (AGNC) is another mortgage REIT. With a market capitalization of $7 billion, it is considerably larger than ORC, however. AGNC Investment primarily owns agency mortgage-backed securities. Agency MBS are those created by Ginnie Mae, Fannie Mae, and Freddie Mac.
Most of the MBSs AGNC Investment owns are comprised of mortgages with a 30-year maturity period, while counterparties for AGNC primarily are located in the US, with some exposure to European counterparties on top of that. Compared with some other mREITs, the long maturity period and agency nature of most of AGNC's MBSs makes AGNC Investment's portfolio less risky.
Like Orchid Island Capital and other mREITs, AGNC will likely feel some headwinds from a flattening yield curve. The spread between the short-term rate at which AGNC borrows and the longer-term rate at which it lends compresses when the yield curve flattens, which leads to lower profitability, all else equal. Due to portfolio growth, AGNC could be able to offset these headwinds, however. We nevertheless calculate with a growth rate of zero.
Even in that scenario, AGNC Investment looks like a solid income pick. The company currently yields 10.8%, based on a dividend of $0.12 per share per month. The dividend has been at that level for around two years, following a dividend reduction in early 2020.
We do not believe that the dividend will grow going forward, as earnings growth will not be meaningful, and since AGNC Investment has not increased its dividend in a long period of time. Even without any dividend growth, payouts to investors will be attractive, thanks to a high initial yield.
Between the yield of close to 11% and some multiple expansion potential, we believe that returns could easily be in the double-digit range going forward.
3: Grupo Aval Acciones y Valores S.A.
Grupo Aval Acciones y Valores S.A. (AVAL) is a Colombian holding company. Its main assets include equity stakes in several banks, such as Banco de Bogota or Banco Popular. The holding company is majority-owned by one of Colombia's richest persons, Louis C. Sarmiento, who owns around 80% of AVAL.
Being a Colombian company, AVAL makes its dividend payments in Colombian Pesos. For US-based investors, the size of the dividend thus fluctuates to some degree, as the COP/USD exchange rate impacts dividends once translated to US Dollars (the same holds true for other non-Colombian shareholders). AVAL has been making monthly dividend payments since 2014, i.e. for about eight years.
Grupo Aval has not been able to grow its earnings-per-share reliably in the past. Instead, earnings-per-share moved up in some years, and down in other years. To some degree, this can be explained by the ups and downs in the Colombian economy over the last decade.
The Colombian economy is quite exposed to commodity pricing around the world, as Colombia is an oil-exporting country. Other commodities that are exported from Colombia include agricultural products such as coffee and fruits, and metals and steel.
With commodity prices rising rapidly in 2021 and early 2022, the Colombian economy should be in a good position this year. This should have a positive impact on the business environment for the banks that AVAL owns equity stakes in. In turn, this should lead to improving profitability for AVAL, which is why we believe that profits over the next couple of years will be higher compared to what we saw over the last couple of years.
We forecast that AVAL's earnings-per-share will rise at a low-to-mid-single digits rate going forward. On top of that, investors should also benefit from some multiple expansion in the coming years, as AVAL is rather inexpensive today, trading for just 5x-6x its expected net profits. Add a dividend yield of around 6%, and it seems likely that AVAL will offer total returns of at least 10% annually going forward.
