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Income-oriented investors continuously try to identify stocks that will offer them a smooth and growing income stream. Monthly dividend stocks distribute their dividends on a monthly (instead of a quarterly) basis and thus they provide a smooth income stream to their shareholders. In addition, most of these companies are extremely shareholder-friendly and usually offer above-average dividend yields. There are 86 monthly dividend stocks right now. In this article, we will discuss the prospects of three monthly dividend stocks that appear undervalued right now, namely SL Green Realty (SLG), AGNC Investment Corporation (AGNC), and LTC Properties (LTC).
 

SL Green Realty

SL Green Realty is a REIT that was founded in 1980 and engages in acquiring and managing commercial properties in Manhattan. It is the largest office landlord in Manhattan, with 61 buildings that have a total leasable area of 33 million square feet.

SL Green Realty is currently facing a perfect storm due to the impact of the pandemic and high inflation on its performance. The pandemic has subsided this year but the work-from-home trend has persisted much more than initially anticipated. As a result, office occupancy in most metropolitan areas, including Manhattan, remains near historically low levels. This has caused an unprecedented tenant-friendly environment, which has led SL Green Realty to offer concessions of several months to its tenants.

It is also important to note that the revenue of SL Green Realty has decreased for six consecutive years and is currently slightly less than half of the revenue of the REIT in 2017. This trend undoubtedly raises a red flag for the stock.

As if the impact of the work-from-home-trend was not enough, SL Green Realty is also hurt by high inflation, which has led the Fed to raise interest rates at an unprecedented pace. Due to the aggressive interest rate hikes implemented by the central bank, the quarterly interest expense of the REIT has nearly doubled since the fourth quarter of 2021. As a result, interest expense is currently consuming about half of operating income. Even worse, as SL Green Realty will need to refinance a portion of its debt in the upcoming quarters, its interest expense will probably increase further in the short run.

On the other hand, the stock has been beaten to the extreme by the market. It is currently trading at a 10-year low price-to-FFO ratio of 4.2, which is much lower than the 4-year average FFO multiple of 9.9 of the stock. In addition, the stock is offering an all-time high dividend yield of 14.1%, with a decent payout ratio of 59%. The dividend is not safe but the REIT will keep offering an above-average yield even if it reduces its dividend. Overall, whenever the occupancy of office space in Manhattan begins to recover, SL Green Realty is likely to offer excessive returns to its unitholders thanks to its depressed current valuation level.
 

AGNC Investment Corporation

AGNC Investment Corporation is a mortgage REIT that was formed in 2008 and invests primarily in agency mortgage-backed securities (MBS) on a leveraged basis. The asset portfolio of the REIT consists of residential mortgage pass-through securities, collateralized mortgage obligations (CMO), and non-agency MBS. Most of the investments of AGNC Investment are fixed-rate agency MBS, with a 30-year maturity period.

Just like most REITs, AGNC Investment is negatively affected by the surge of inflation to multi-year highs but for a different reason. The aggressive interest rate hikes executed by the Fed have significantly increased the interest expense of most REITs but AGNC Investment has a different issue. The steep interest rate hikes have caused an inverted yield curve, i.e., short-term interest rates have risen far above long-term interest rates. This abnormal yield curve has resulted from fears that high-interest rates will cause a recession this or next year.

Unfortunately for AGNC Investment, the negative yield curve poses great challenges to the company. AGNC Investment borrows funds based on short-term interest rates and invests in securities that offer yields based on long-term interest rates. It is thus evident that the current investing environment is unfavorable for the company.

On the bright side, due to the adverse business landscape, the stock of AGNC Investment has become exceptionally cheap. It is currently trading at a price-to-earnings ratio of 4.0 and is offering a 14.3% dividend yield. While the payout ratio is decent, at 60%, the dividend is not safe due to the vulnerable business model of the company. Nevertheless, even if the REIT cuts its dividend, it is likely to continue offering an above-average yield.

Moreover, the worse seems to be behind AGNC Investment with respect to interest rates, as the Fed is likely to end its cycle of rising rates in the upcoming months. Whenever interest rates begin to revert towards normal levels, the stock of AGNC Investment is likely to offer outsized returns to its unitholders thanks to its cheap current valuation.
 

LTC Properties

LTC Properties is a REIT that invests in senior housing and skilled nursing properties. Its portfolio consists of approximately 50% senior housing and 50% skilled nursing properties. The REIT owns 215 investments in 29 states with 31 operating partners.

LTC Properties is facing a headwind due to the pandemic and the ongoing economic slowdown, which have led some tenants to defer their payments. In addition, the REIT is hurt by multi-year high-interest rates, which are likely to significantly increase the interest expense of the trust. As a result, the stock is trading at a 10-year low price-to-FFO ratio of 12.6.

However, LTC Properties has begun to recover from the pandemic thanks to its solid business model. The REIT benefits from a strong secular trend, namely the high growth of the population that is above 80 years old. This growth results from the aging of the baby boomers’ generation and the steady rise of life expectancy thanks to sustained progress in medical sciences. It is also important to note that the healthcare industry has repeatedly proved resilient to recessions thanks to its essential nature.

LTC Properties is currently offering a 10-year high dividend yield of 6.7%. Its payout ratio is elevated, at 84%, and hence the dividend is not safe. Notably, the REIT has been paying the same dividend for 7 consecutive years, thus signaling that it is struggling to maintain its generous payout. On the other hand, thanks to its cheap valuation, LTC Properties is likely to highly reward investors whenever interest rates normalize and the economy accelerates again.
 

Final Thoughts

The above three monthly dividend stocks have been punished by the market due to the headwinds facing their business right now, mostly high-interest rates and slow economic growth. As soon as economic conditions normalize, these stocks are likely to offer outsized returns to investors thanks to their cheap valuation. Nevertheless, due to their high stock price volatility, these stocks are suitable only for patient investors, who can remain focused on the long run during rough economic periods.

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