I remember back to when I first started investing right out of graduate school. Since I didn’t have a lot of income at that time, I got hooked on buying income-producing shares in the hopes that someday they’d provide enough income for me to quit my day job. I’m still waiting for that day to arrive. What I’ve done in the meantime is built a fairly balanced income-generating portfolio where I’ve staggered my dividend payers so that I get roughly the same income each month. As you know, most companies that pay a dividend do so quarterly, which creates a…
I remember back to when I first started investing right out of graduate school. Since I didn’t have a lot of income at that time, I got hooked on buying income-producing shares in the hopes that someday they’d provide enough income for me to quit my day job. I’m still waiting for that day to arrive.
What I’ve done in the meantime is built a fairly balanced income-generating portfolio where I’ve staggered my dividend payers so that I get roughly the same income each month. As you know, most companies that pay a dividend do so quarterly, which creates a bit of a challenge if you want more regular income. That was until I discovered the companies that paid a monthly dividend.
I say “discover,” but what really happened was that a company I owned, Prospect Capital (NASDAQ: PSEC) needed to cut its payout, but as part of that deal it switched to paying investors on a monthly basis. Prospect, which is structured as a business development company, has to pay out 90% of its taxable income to investors. Today that equates to a nearly 12% yield, which it still pays in monthly installments. Even better, each month Prospect has given investors a small raise, making it a great choice for steady monthly income.
Prospect is not alone, as just last year Vanguard Natural Resources (NYSE: VNR) switched to a monthly payout. The company, which is a publicly traded partnership, is engaged in the acquisition, production, and development of oil and natural gas properties. Its MLP-like or Master-Limited Partnership structure has a similar payout requirement as Prospect Capital, leading to a large yield of almost 9% on an annual basis. While investors liked the yield, they wanted to see it more often. According to CFO Richard Robert:
We have listened to investors and we believe that we are giving them what they want. A monthly distribution should allow investors to better manage their finances by matching their monthly cash outflows with monthly cash inflows. In addition, a monthly distribution will allow us to reward our investors in a timelier manner as we make accretive acquisitions in the future. We believe the decision to pay distributions monthly rather than quarterly will be welcomed by both our current Vanguard unitholders as well as other potential investors looking to invest in high-yielding energy securities.
It would appear that more companies will be joining the monthly-payout bandwagon. LINN Energy (NASDAQ: LINE) hinted in its last earnings release that it, too, will be switching to a monthly payout. Specifically, the company said that “management is evaluating a change in the company’s distribution policy to increase the frequency of its cash distributions from quarterly to monthly.” The change would also be likely to affect investors in its affiliate, LinnCo (NASDAQ: LNCO), as the company only owns units of LINN and pays out all of its income to investors. As an investor in both, I wouldn’t mind seeing more frequent payments.
It also wouldn’t surprise me to see more MLPs following suit in the future, especially those whose units have underperformed. In this yield-starved environment, investor appetite for a company’s units can be an important competitive advantage in raising capital. Because these companies pay out all of their income, raising capital is the only way to grow. In my opinion, if you give investors what they want — a frequently growing paycheck — they’ll continue coming back for more.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Matt DiLallo, and was first published on fool.com. Matt is a contributor to fool.com and owns shares of Linn Energy and LinnCo.