Most dividend-paying companies pay shareholders once per quarter. Investors relying on this type of payment schedule may find they are lacking income in the months they don’t receive dividends. Fortunately, there are several options for investors looking for a monthly dividend payment.
Stocks that offer monthly dividends allow investors to achieve regular cash flows. It should be noted that high yields can be a sign a dividend is likely to be cut. Paying a high yield often requires companies to have a high payout ratio. If the company’s business underperforms, it could be forced to cut its dividend. High-yielding companies such as these should only be owned by investors with a higher risk tolerance.
Global Net Lease Inc. (GNL, Financial) is one monthly dividend stock that pays a very high yield and looks attractive right now.
Company background
Global Net Lease is a real estate investment trust. The trust owns and invests in commercial properties in the U.S., the United Kingdom, Germany, France and several other European countries. Approximately 56% of properties are in the U.S., with the remainder in Europe. The REIT is a relatively young entity, having only been public since 2015.
The company operates its properties as a triple net lease, meaning tenants are responsible for the maintenance, insurance and taxes for the property. The trust acts as a landlord and collects rent, which it can then pass on to shareholders.
Global Net Lease has 343 properties spread out over 112 tenants in 45 industries. The trust counts well-known companies such as FedEx (FDX, Financial), ING (ING, Financial) and Family Dollar among its top 10 tenants. The “other” category accounts for 38% of the portfolio. Financial service companies are the next largest individual part and account for 12% of the trust’s portfolio. No other industry represents more than 6% of the portfolio, which means Global Net Lease’s tenants are fairly diversified.
Recent financial results
Global Net Lease reported first-quarter results on May 9. The company’s adjusted funds from operations totaled 48 cents per share, which was in line with consensus estimates. Revenue grew nearly 11% to $75.5 million, though this was slightly below expectations.
At the end of the quarter, the real estate portfolio was 99.5% leased with a weighted-average lease term of 8.1 years. Approximately 91.9% of the portfolio contains annual rent increases, while 75.7% of the portfolio has an investment-grade credit rating. As a percentage of rents, office contributed 53%, industrial and distribution accounted for 39% and retail was 8%.
Global Net Lease has been an active acquirer in recent years and the first quarter was no different. The trust added two net leased assets with nearly 117,000 square feet. The first property that was acquired was a 36,720-square foot industrial facility in Gillette, with 9.7 years remaining. The second property was an 80,000-square foot office property located in Fishers, Indiana. This property lease has 9.3 years remaining.
The REIT also agreed to expand and remodel four properties in exchange for an increased annual rent. Altogether, the deals made during the quarter have a weighted average cap rate, meaning the rate of return based on the income that property is expected to generate, of 7.67%. The average weighted remaining lease is 9.3 years.
Listed below are Global Net Lease’s adjusted funds from operations since becoming a publicly traded company:
- 2015 adjusted funds from operations: $1.96
- 2016 adjusted funds from operations: $2.24
- 2017 adjusted funds from operations: $2.10
- 2018 adjusted funds from operations: $2.11
Global Net Lease’s overall performance on this metric has been very muted. Given the short public history, we are comfortable assuming investors will see 0% adjusted funds from operations growth through 2024. We expect Global Net Lease to produce adjusted funds from operations of $2.15 for 2019.
Dividend history, valuation and total expected returns
Global Net Lease has paid a dividend every year that it has been a publicly traded company. Investors looking for dividend growth will be disappointed as the REIT hasn’t increased its dividend since the July 15, 2015 payment. Still, it offers an 11.2% dividend yield, which is nearly six times the average yield of 1.9% for the S&P 500. The trust has also never cut its dividend since its initial public offering.
The company’s current annualized dividend of $2.13 represents 99% of our expected adjusted funds from operations for the year. This type of payout ratio is not unusual for the trust as adjusted funds from operations only covered Global Net Lease's dividend in the first two years that it was public. In 2017 and 2018, dividends consumed more than 100% of dividends.
REITs are required to pay out at least 90% of income in the form of dividends, so payout ratios are often very high. Still, any downturn in Global Net Lease’s business could potentially lead to a dividend cut.
Shares of Global Net Lease ended the May 9 trading session at $18.73. Using the expected adjusted funds from operations for 2019, the stock trades with a price-AFFO ratio of 8.8.
Due to lack of adjusted funds from operations growth over the past several years and the relatively short public history, we assign the company a price-AFFO ratio of 8.5 for 2024. If shares reverted to this target by 2024, the valuation would be a 0.7% headwind to total annual returns over this time period.
Total annual returns for Global Net Lease are likely to be satisfactory, even in the case of low-to-no funds from operations growth, due to the company's high dividend yield. The company can offer an annual return of 10% to 11% through 2024.
Conclusion
Investors relying on monthly dividend income have a limited selection of stocks to choose from, thus narrowing their choices. Just because a stock pays a very high monthly dividend doesn’t mean it is a good investment choice.
While Global Net Lease has been a publicly traded company for a very short time, we are attracted to the trust’s portfolio of mostly investment-grade companies. The dividend payout ratio is elevated, even for a REIT, but the yield is very generous. Our expected total annual return will be conservative if the trust is able to grow adjusted funds from operations by any measure or rises to a higher valuation.
Disclosure: I am not long any of the stocks mentioned in this article.
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