5 Monthly Dividend Stocks to Snag in 2014

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Even the best dividend stocks tend to have one major disconnect: Most of us pay our bills on a monthly cycle, yet most stocks that pay dividends do so only once per quarter. This can make budgeting a headache and adds an extra level of planning.

Sure, a diversified portfolio of the best dividend stocks will have payment dates spread across the calendar, but your income stream is still generally going to be lumpy and uneven. That’s why monthly dividend stocks would be vastly preferable for most investors.

And aside from budgeting concerns, there is another major reason why monthly dividend stocks are preferable: compounding. If you reinvest your dividends in additional shares instead of using the income for current needs, you compound your wealth significantly faster, as the number of shares paying you a dividend rises every single month.

On a $100,000 portfolio, this might amount to a couple hundred bucks over the course of a single year. But remember, compounding is not linear; it's exponential. Over the span of an investing lifetime, that "couple hundred bucks" from monthly dividend stocks can turn into tens of thousands of dollars. (If you want to see how the math works, check out Accounting Coach.)

Several income-focused mutual funds and closed-end funds do, in fact, pay monthly. But most are concentrated in low-yielding bonds, and if you're like me, you prefer to hand pick the best dividend stocks for both income growth and capital appreciation.

The good news: There are actually quite a few monthly dividend stocks to choose from. Let's take a look at some of my favorites.

Best Monthly Dividend Stocks - Realty Income

Dividend Yield: 5.9%

The first of our monthly dividend stocks is a REIT that calls itself the “Monthly Dividend Company” — Realty Income (O).

Realty Income paid its first dividend in 1970, before it was publicly traded, and hasn't slowed down since. It's paid 519 consecutive monthly dividends and raised its dividend 73 times — and in 64 consecutive quarters. That definitely makes Realty Income not just one of the best monthly income stocks, but one of the best dividend stocks period.

Since 1994, when Realty Income started trading on the NYSE, the REIT's annualized dividend has risen from 90 cents per share to $2.18 per share. At its current price, that amounts to a dividend yield of 5.9%.

Realty Income is one of those rare monthly dividend stocks that I believe you can truly buy, put in a drawer, and forget about for years. As a conservative, triple-net REIT, it's what I would call an “Armageddon-proof” investment. It owns a diversified portfolio of 3,800 properties across 49 states that are rented under long-term leases primarily to high-quality tenants.

The “typical” property for Realty Income would be your local Walgreens (WAG) or CVS (CVS) pharmacy — a high traffic, highly visible location that you pass on your daily commute. And under a triple-net lease, it is the tenant’s responsibility to take care of the property and to pay the taxes and expenses.  The landlord's only role is to collect the rent check. Not bad work, if you can find it.

I recently listed Realty Income as a stock you can “buy and hold forever,” and I would reiterate that recommendation today.

Best Monthly Dividend Stocks - American Capital Realty Properties

Dividend Yield: 7.6%

Next on the list of monthly dividend stocks is one of Realty Income's upstart competitors, American Capital Realty Properties (ARCP).

I call ARCP an “upstart” due to its short trading history (it's only been trading since 2011).  But the truth is, after its merger with Cole Properties (COLE), ARCP will be the largest triple-net REIT by market cap, and its total square footage will be nearly double that of Realty Income. And while ARCP stock has a short history, its executive team has an average of 20 years experience in the industry.

Because of its shorter trading history, this monthly dividend stock trades at a decent-sized discount to Realty Income. Based on its last monthly dividend of 8 cents, ARCP is one of the best dividend stocks, yielding 7.6%. That kind of yield is hard to come by these days unless you're willing to accept some pretty significant risk.

Writing for Barron's earlier this month, Vito Racanelli suggested that ARCP stock was 20% to 40% undervalued relative to its peers. I would agree, but I would also mention that I consider its peers (such as Realty Income) to be attractively priced as well.

If you're buying the stock for income, capital appreciation is a secondary concern. Still, no one complains when an income stock (especially one of our monthly dividend stocks) ends up generated high capital gains.

Best Monthly Dividend Stocks - Banco Bradesco and Banco Itau

Dividend Yield: 4.9% and 3.9%, respectively

And speaking of top dividend stocks with high capital gains potential, next on the list of are Brazilian banking groups Banco Bradesco (BBD) and Banco Itau (ITUB) — two monthly dividend stocks you must consider.

Sure, it's a little bit of a stretch to call Bradesco and Itau true “monthly dividend stocks.” Both are indeed stocks that pay dividends monthly, but the monthly dividends are pretty modest (the last monthly dividends were each under 1 cent). Much larger dividends are paid semiannually, giving the banks respectable trailing 12-months yields of 4.9% for BBD stock and 3.9% for ITUB stock. Still, the fact that these are monthly dividend stocks instills discipline in management, and I respect the nod to shareholder friendliness.

It has not been a kind year for investors in Latin America and in Brazil in particular. Most stock averages in the region are down for the year. The Brazilian currency, the real, started 2013 grossly overpriced, and slowing in China has taken the wind out of Brazil's sails.

But with 2013 now drawing to a close, the real is reasonably priced again, and much of the hot money has fled the region. If China picks up steam in 2014 — and I expect that it will — then I expect the Brazilian economy to come back to life.

And I expect investors to rediscover the region, along with these two monthly dividend stocks.

Best Monthly Dividend Stocks - Whitestone REIT

Dividend Yield: 8.7%

Returning to U.S. shores, the next of our monthly dividend stocks is Whitestone REIT (WSR), a smaller REIT that specializes in shopping centers.

I should start by making one point very clear: while I like Whitestone, it is a very different kind of REIT than Realty Income or American Realty Capital Properties. Its property portfolio is far less geographically diversified (with properties in just three states), and it is a much smaller company by market cap ($290 million).

Still, despite its small size, Whitestone has been inking deals with some heavy hitters of late, including Wal-Mart (WMT). And with the U.S. economy slowly shifting back into growth mode, Whitestone should decent rent growth going forward in its retail properties.

Whitestone currently yields 8.7%, making it the highest-yielding name on this list of monthly dividend stocks. Part of this is due to its lack of dividend growth; the stock has paid 9.5 cents per month since September of 2010.

I'm OK with that, though. As investors in monthly dividend stocks, we can collect that monthly dime per share indefinitely, reinvesting it to grow our share count.

Best Monthly Dividend Stocks - Student Transportation Inc.

Dividend Yield: 8.4%

Finally, for an off-the-wall pick, consider picking up shares of Student Transportation (STB), North America's third-largest operator of school buses.  Student Transportation doesn’t just operate more than 10,000 school buses and transport more than a million students daily across the United States and Canada. It’s a monthly dividend stock with a solid yield.

STB stock currently yields about 8.4%. But this is a riskier play than the other monthly dividend stocks on this list for a couple reasons. First, because the company has been aggressively expanding in recent years and has all of the expenses associated with rapid expansion, Student Transportation has been paying a decent chunk of its dividend from new debt issuance. This puts the dividend at risk if the capital markets tighten up or if expected growth fails to materialize.

And secondly, a decent chunk of the company's sales come from Canada, where it is headquartered, so currency risk is also an issue. I believe there is a good chance that the dollar will rally in 2014 as the Fed scales back its quantitative easing. This could cause Student Transport's dividend to fall slightly in U.S. dollar terms.

Still, while a little riskier than some of the other monthly dividend stocks, I like STB stock as a portfolio diversifier and I believe that its dividend is safe for at least the next several quarters.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long O, ARCP and WMT. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today's exciting megatrends.