I love the fact that most U.S. companies pay dividends on a quarterly basis, as opposed to annually or semiannually for most international stocks. After all, company executives are paid a monthly salary, so why should a rightful owner of a company have to wait a full year to get paid?
What's even better than quarterly pay is monthly pay, which enables investors to achieve a higher level of financial resilience, by being able to match monthly cash outflows with recurring income. This brings me to the following 2 picks for income investors, which when combined, average a 7.6% yield paid monthly.
Pick #1: Realty Income Corporation
Realty Income (O) is the largest net lease REITs by asset size and is one of just 64 companies with the elite S&P 500 Dividend Aristocrats index. It so prizes its reputation giving investors reliable income that it bills itself as the "Monthly Dividend Company". Since IPO in 1994, Realty Income has given investors a 14.6% compound annual total return, far surpassing the long-term ~10% CAGR of the S&P 500 Index (SPY).
Since shedding "riskier" office properties through the spin-off of Orion Office REIT (ONL), Realty Income's remaining properties are comprised of essential retail and service-related segments, with grocery, convenience stores, dollar stores, quick service restaurants, and drug stores comprising its top 5 sectors and comprising 40% of annual base rent.
Realty Income differentiates itself from the pack due to its low cost of capital, as it's just one of a handful of REITs with an A- or better credit rating, thereby resulting in lower cost of debt. This is reflected by O's strong debt ratios, including a net debt to EBITDA of 5.2x and fixed charge coverage ratio of 5.5x.
Moreover, O has plenty of balance sheet flexibility, as 95% of its debt is unsecured and 88% is at fixed rate with weighted average 6.3 years to maturity. It also carries plenty of dry powder, with a staggering $2.5 billion in total liquidity, comprised of $188 million cash on hand and $2.3 billion in availability on its revolving credit facility. As shown below, it has minimal debt maturing this year, thereby mitigating the impact of higher rates in the near term.
While some may believe that Realty Income has become too big to be able to move the needle, its recent purchase of Encore Boston Harbor Resort and Casino proves otherwise. This is sizeable $1.7 billion acquisition is triple-net leased by Wynn Resorts (WYNN) and comes with a respectable 5.9% cash cap rate and has annual lease escalators.
Meanwhile, Realty Income pays a respectable 4.5% dividend yield that's protected by a 75% FFO payout ratio. It's also reasonably priced at $66.85 with a forward P/FFO of 16.7, sitting below its normal P/FFO of 19.3, setting up investors for potentially strong total returns through dividends and capital appreciation.
Pick #2: Horizon Technology Finance
Horizon Technology Finance (HRZN) is an externally-managed BDC that provides secured loans to venture capital and private equity backed growth companies in the technology, life science, and healthcare information and services industries.
Like many of its BDC peers, HRZN has proven to be resilient over the past 3 years amidst economic ups and downs, by maintaining and even raising its monthly dividend over this timeframe. This includes the most recent 10% raise to a $0.11 monthly dividend rate. Importantly, the dividend is well protected with 77% payout ratio, based on $0.43 in NII per share generated during the last reported quarter. This gives HRZN plenty of retained capital to either continue paying a special dividend or to self-fund add-on investments.
HRZN is just a handful of BDCs to invest in the aforementioned high growth categories, and generates solid financials, with a high 15.9% TTM average debt portfolio yield, sitting well above the ~11% BDC average. This is also due in part to higher interest rates, as 100% of HRZN's debt investments are floating rate.
Looking ahead, It also benefits from having a large addressable market, that's estimated to be $49 billion. HRZN has opportunities to address opportunities, as it has a sound balance sheet with a debt to equity ratio of 1.18x, sitting well below the 2.0x statutory limit.
Importantly, management has been prudent with shareholder capital since its 2004 inception. This is reflected by its low annual historical loss rate of just 0.05%. Also, the current portfolio appears to be overall healthy, with a weighted average credit rating of 3.1 out of 4, with 4 being the lowest risk. Specifically, 97% of HRZN's portfolio is rated at 3 or higher and it had no investments on non-accrual as of the last reported quarter.
Lastly, I continue to see value in HRZN at the current price of $12.41 with a price to book ratio of 1.06x. As shown below, this sits at the low end of its trading range over the past 5 years. Analysts also have a consensus Buy rating on the stock with an average price target of $13.41, implying potential for strong total returns in the high teens over the next 12 months.
Investor Takeaway
Realty Income and Horizon Technology Finance are two solid income investments that offer investors attractive dividend yields that are well protected by cash flow and have potential for capital appreciation. Both have proven to be resilient amidst recent economic ups and downs and their respective managements have done an excellent job of preserving shareholder capital. Lastly, both picks offer good diversification and a high average yield that's paid monthly when combined.
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