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Investing in Monthly Dividend Payers: Choosing the Right Mix for Safety and Growth

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Investors seeking both safety and growth can find profitable opportunities in monthly dividend payers. Notably, three stocks stand out in this category: Main Street Capital (NYSE: MAIN), Realty Income Corporation (NYSE: O), and Agree Realty Corporation (NYSE: ADC). Each of these companies offers a unique combination of stability, growth potential, and attractive dividend yields.

An Introduction to Business Development Companies (BDCs)

Before diving into an analysis of these three stocks, it’s essential to understand the nature of Business Development Companies (BDCs). These investment firms are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, making them a popular choice for income-focused investors. BDCs were established in 1980 to provide public investors with access to private U.S. businesses and help small companies access capital.

When it comes to investing in BDCs, it’s crucial to consider their investment portfolios, debt profiles, and sustainability of dividends.

Main Street Capital: A Reliable Performer

As one of the top-ranking BDCs, Main Street Capital (MAIN) has proven its ability to weather economic storms and provide consistently growing dividends. Unlike many companies that had to cut dividends during the 2008 recession and the COVID crisis, Main Street Capital maintained its payouts. The company has even doubled its regular dividend since its IPO in 2007, while also frequently offering special dividends.

Main Street Capital boasts a diverse portfolio, with investments spread across various industries, geographies, and transaction types. This diversification, along with a high percentage of first-lien loans and minimal non-accruals, contributes to the company’s stability. Main Street Capital also benefits from a fixed-rate funding model, which increases cash flow and net investment income during rising interest rate environments.

The company has a solid BBB-/stable credit rating from Fitch and S&P, and its debt maturity schedule is well-laddered. Analysts project a 25% increase in Main Street Capital’s earnings per share (EPS) from $3.29 in 2022 to $4.11 in 2023. With a current yield of approximately 8.3%, Main Street Capital presents an attractive investment opportunity.

Realty Income Corporation: Stability and Resilience

Realty Income Corporation (O) is a stalwart in the real estate investment trust (REIT) sector and has consistently delivered robust dividend growth. During the COVID pandemic, Realty Income was the only REIT listed in the S&P 500 that raised its dividend. The company has a track record of weathering economic downturns with minimal volatility compared to its peers.

Realty Income’s portfolio is highly diversified, with properties located in all 50 U.S. states, Puerto Rico, and international markets. The company boasts 1,303 clients across 85 industries, with 91% of its total rent being resilient to economic downturns and isolated from e-commerce competition. Investment-grade clients make up 40% of Realty Income’s rent, adding an extra layer of stability.

With 93% of its debt at a fixed rate and the ability to borrow at lower rates in Europe, Realty Income minimizes the impact of rising interest rates. The REIT also maintains well-laddered debt maturities and has investment-grade credit ratings of Baa1/BBB stable. Realty Income currently offers a yield of 5.56% and possesses strong potential for long-term growth, trading below its net asset value and at a historically low P/AFFO ratio.

Agree Realty Corporation: Small but Dynamic

Agree Realty Corporation (ADC) is relatively new compared to Main Street Capital and Realty Income, but don’t let its shorter track record fool you. This triple-net lease REIT has developed a strong business model and offers enticing growth potential. Triple-net lease tenants cover all property expenses, making them highly attractive to income-focused investors.

ADC holds over 1,900 properties across 48 states, with a weighted average lease term of 8.8 years and 68% of its tenants being investment grade. The company focuses on recession-resistant and e-commerce-resistant clients, providing further stability. A unique aspect of Agree Realty is its ground lease platform, where the tenant owns the building while ADC owns the land. This diversifies the company’s income streams and adds another layer of stability to its portfolio.

With investment-grade credit ratings of Baa1/BBB stable, well-laddered debt maturities, and a current yield of 5.28%, Agree Realty is an attractive option for investors seeking growth potential. Its tenant mix, consisting of reputable companies like Home Depot, Walmart, and Costco, enhances the REIT’s stability.

Summing It Up: Seeking the Right Balance

Investors seeking monthly dividend payers can find an appealing blend of safety, growth, and income in Main Street Capital, Realty Income Corporation, and Agree Realty Corporation. Main Street Capital offers stability, frequent special dividends, and impressive historical performance. Realty Income combines stability with consistent dividend growth and a diversified portfolio. Agree Realty presents a smaller but dynamic option, with a focus on recession-resistant tenants and a unique ground lease platform.

It’s worth noting that in the current market environment, both Realty Income and Agree Realty have experienced a decline in valuations due to rising interest rates. However, this presents an opportunity for investors to acquire these stocks at potentially discounted prices.

While all three stocks present attractive investment opportunities, Agree Realty stands out as the top choice due to its high growth potential. However, Main Street Capital and Realty Income remain solid options as well.

Disclaimer: The author owns shares of Main Street Capital and Realty Income. The opinions expressed in this article are solely those of the author and should not be considered investment advice. Investors are encouraged to conduct their own research and consult with a financial advisor before making any investment decisions.

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