11 Monthly Dividend Stocks That Let You Sleep Well At Night

January 28, 2014

Dividend Stocks

In a world of low interest rates mom and pop investors are having a hard time finding low risk investments that will provide adequate income. This is particularly true for retirees or individuals approaching retirement themselves. Think about it for a moment:

  • Money Market accounts offer a pathetic .053%
  • A 5 Year Certificate of Deposit (CD) grants you a measly 1.5%
  • 10 Year U.S. Treasuries  at the moment are offering a modest 3%

Oh and I forgot to mention that all three of those investment vehicles are subject to income tax! Additionally don’t forget about our nasty friend called “INFLATION!” As of today the current inflation rate is 1.5%. This immediately makes the first two investment vehicles I mentioned a losing investment from the start once inflation and taxes are taken into consideration. Your best bet would be the 10 Year U.S. Treasuries but how can you realistically live off of a 1.5% return on your money before taxes?

Dividend Investing For Income

Because of the situation I described above, a massive number of investors have turned to dividend investing in order to generate enough income for their own personal situations. This makes complete sense and I have personally done the same thing. However, a lot of investors are doing it all wrong!

Inexperienced investors are flocking towards popular dividend producing investment vehicles such as:

  • Real Estate Investment Trust (REITs)
  • Master Limited Partnerships (MLPs)

While these are all legitimate businesses, I have found that investors pile their hard earned money into these stocks without understanding the underlying asset or business. The most jaw dropping investment approach I have seen personally is individuals investing in a business solely on the current dividend yield of the stock. This is an absolute recipe for disaster!

Nightmare Dividend Example

In 2010 Overseas Shipholding Group (OSGIQ) was trading for approximately $40/share and had a dividend yield of 4.4% – A pretty handsome yield compared to the options I previously mentioned. OSGIQ’s primary business function is the ocean transportation of oil and petroleum products – in short they are oil tankers. This was big business back in 2005, 2006, and 2007  however in 2008 when global shipping rates fell, the demand for oil dropped, and when new competition sprouted it took a severe toll on the industry. Numerous companies were forced into bankruptcy and ultimately OSGIQ was forced to file as well.

OSG bankruptcy | OSGIQ bankruptcy

At one point during its downfall the company offered a dividend yield of 12% – Heck that’s more than the average S&P 500 return. But history tells us if something seems too good to be true chances are that it is.

So What Other Options Are There?

Well I’m glad you asked! I believe the best investment vehicle for individuals looking for low risk investment income are tax free Municipal Bonds.

What are Municipal Bonds?!

When a local government needs to build a new toll road, school, or facility it borrows money. Specifically the local government raises the money by taking out a loan from the public (selling municipal bonds). As with any other loan there is a set amount that is borrowed, an interest rate is set, as well as a payback date. The government then promises to pay back the money it borrows through revenues from the municipality or state. The revenues may come from the taxes of residential real estate, businesses or tolls. As the lender you can now consider yourself “The Bank.”

But it gets even better

In order to attract and allure investors to lend money to local governments, the U.S. government made a tax law stating investors don’t have to pay federal income taxes on the interest they earn on their municipal bonds. To makes things EVEN better most U.S. States do not tax bonds issued from their state. For this reason very wealthy individuals in high tax brackets absolutely love municipal bonds. They simply buy them and hold until maturity while they collect tax free income.

Municipal bond Funds

A lot of investors have heard of mutual funds but I’m willing to bet you that not a lot of investors have heard about closed end mutual funds. Most of your mom and pop investors who pile into mutual funds through their 401ks or IRAs are contributing to open-end funds.

Open-end funds – This type of fund will issue as many shares as investors are willing to buy. Therefore when mom and pop investors invest more money into this type of fund, the fund simply creates more shares,  then turns around and buys more shares of the underlying stocks. Because of this, the price you pay for one share of an open-end fund will always be the total value of the overall portfolio divided by the current number of shares outstanding. This is called the “net asset value (NAV).

Closed-end funds – These funds are completely different, they issue a limited number of shares. If mom and pop investors want to buy these shares, they must go into the stock market where they trade like a normal stock. Therefore in order to  buy a share of a closed-end fund, another investor must be willing to sell their shares. Because of this, closed-end funds fluctuate considerably more than open-end funds in share price but this is not a reflection of the actual NAV of the funds portfolio.

11 Monthly Dividend Stocks

So far you’ve discovered

  • The problem with obtaining investment income
  • Some pitfalls in dividend investing for income
  • The magnificent opportunity of tax free municipal bonds
  • The opportunity that closed-end funds offer

Now that we know all this, I’m going to blow you away and show you 11 stocks that offer dividends on a monthly basis. Not only will these stocks offer you monthly income but they will allow you to sleep well at night knowing that your investment isn’t tied to the stock market.

1 – Invesco Value Municipal Income (IIM)

  • Portfolio layout: 85% above A credit rating
  • NAV: $15.00
  • Current Discount to NAV: 8.8%
  • Current Yield: 6.43%

2 – Alliance CA Municipal Income Common (AKP)

  • Portfolio layout: 87% above A credit rating
  • NAV: $13.98
  • Current Discount to NAV: 10.3%
  • Current Yield: 6.01%

3 – Alliance Bernstein National Municipal Income Fund (AFB)

  • Portfolio layout: 85% above A credit rating
  • NAV: $13.85
  • Current Discount to NAV: 6.3%
  • Current Yield: 6.74%

4 – Blackrock Municipal Income Investment Quality Trust (BAF)

  • Portfolio layout: 97% above A credit rating
  • NAV: $14.83
  • Current Discount to NAV: 9.3%
  • Current Yield: 6.14%

5 – Blackrock Municipal Income Quality Trust (BYM)

  • Portfolio layout: 93% above A credit rating
  • NAV: $14.47
  • Current Discount to NAV: 6.7%
  • Current Yield: 6.85%

6 – Blackrock Municipal Bond Investment Trust (BIE)

  • Portfolio layout: 93% above A credit rating
  • NAV: $15.18
  • Current Discount to NAV: 8.4%
  • Current Yield: 6.58%

7 – Blackrock NY Municipal Income (BSE)

  • Portfolio layout: 88% above A credit rating
  • NAV: $13.90
  • Current Discount to NAV: 10.2%
  • Current Yield: 6.04%

8 – DWS Municipal Income Trust (KTF)

  • Portfolio layout: 96% above A credit rating
  • NAV: $13.00
  • Current Discount to NAV: 3.3%
  • Current Yield: 6.73%

9 – Nuveen Michigan Quality Income Municipal Fund (NUM)

  • Portfolio layout: 90% above A credit rating
  • NAV: $14.76
  • Current Discount to NAV: 11.3%
  • Current Yield: 6.78%

10 – Nuveen Municipal Opportunity (NIO)

  • Portfolio layout: 90% above A credit rating
  • NAV: $14.71
  • Current Discount to NAV: 7.2%
  • Current Yield: 6.43%

11 – Nuveen Quality Municipal Fund (NQI)

  • Portfolio layout: 96% above A credit rating
  • NAV: $14.09
  • Current Discount to NAV: 10.8%
  • Current Yield: 5.95%

I’m so sorry, I forgot to mention that all of these monthly dividend stocks trade at a discount to their NAV. That means if a stock is trading at a 10% discount you are literally paying 90 cents for a dollar! So not only are you getting low risk tax free income you are buying a fantastic asset at a discount!

Here’s to our wealth!

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23 Responses to “11 Monthly Dividend Stocks That Let You Sleep Well At Night”

  1. Martin Says:

    Marvin, thanks for this review. I typically avoid bonds. I do not know why, but I have somewhat aversion to them as I think there are better investments than bonds. But your list of income trusts and funds is something I may review and give it a shot!

    Reply

    • Marvin Says:

      Glad I could sway you a little bit Martin. For guys our age I still think the majority of our portfolios should be in stocks but there’s nothing wrong having a small portion of it in fixed income. This is a great opportunity for retirees or individuals close to retirement.

      Reply

  2. David Says:

    Some great information here for investor seeking income. Monthly dividends, what’s not to like!

    Reply

  3. FI Fighter Says:

    Good stuff Marvin! You are right about the reits… I remember when mREITs were getting all the buzz and everyone was recommending NLY and AGNC. People were piling on the bandwagon, enticed by the monstrous yield. One year later, well, the results speak for themselves.

    I don’t follow stocks as closely as I once did, but if you are going to invest for dividends, make sure you buy the right companies!

    Reply

    • Marvin Says:

      I hopped on the NLY bandwagon as well. I was lucky enough to get out before the plunge but these are much safer. I’m hoping to take a page from your playbook and start getting into some real estate.

      Reply

  4. Joe Saul-Sehy Says:

    I love munis and own a Nuveen product right now. However, the waters in the bond market are still dangerous. I think you need to go into these products realizing that if you’re a long term investor you’re okay, but over the short term you’re going to see some volatility as the Fed unwinds their Treasury purchasing habit.

    Reply

    • Marvin Says:

      You are exactly right Joe. I believe if investors can whether the storm and have some dry powder over the next 12-18 months munis will be a great investment!

      Reply

  5. writing2reality Says:

    Something to note is the reason why all of these funds are trading at a 3-11% discount to NAV is because the interest rate risk of these holdings. When interest rates do go up, these funds will see some downward pressure as people attempt to move to other higher yielding investments.

    Reply

    • Marvin Says:

      Absolutely and I love it, until we start seeing 6-7% offered through CDs I plan to stick with munis long term. Of course they will be A grade and above. I’m more interested in the yield than the variations in the price of the bond. As Joe pointed out the municipal road will get shaky here soon, but it will be well worth the ride in my opinion.

      Reply

  6. Donny Gamble Says:

    I love investing in dividend paying stocks because they limit the amount of risks that you take in the stock market because you are able to capitalize on the dividend payments.

    Reply

    • Marvin Says:

      Great point, they due limit risk but definitely do not eliminate it. You must conduct due diligence and ensure you are buying a great business or asset.

      Reply

  7. Troy Bombardia Says:

    I personally don’t really like dividend stocks. Let’s assume a stock has an annual dividend of 10%. A stock can easily tank 10% in a year, wiping out any dividends. I think we should focus on capital gains instead of dividends.

    Reply

    • Marvin Says:

      I have to disagree Troy. My main focus is valuating a business, unfortunately I have found that the market is not always efficient and can sometimes due to numerous circumstances either over value or under value a business. If I can find a great stable business and purchase it at a great price, I very rarely worry about the capital gains of that business. I’m looking for positive cash flow and passive income. In fact, I hope that some of the stocks (businesses) that I own tank 10%, that way I can buy more! =)

      Reply

  8. Original Subscriber Says:

    are u holding these in a taxable account or in a tax advantaged/deferred account like IRA/40OK? Thanks

    Reply

    • Marvin Says:

      I hold these dividends in my own personal account. There is no need for me to put them in a tax advantaged account. Since I am already getting a tax benefit I would much rather have access to those positions and that capital prior to my retirement age.

      Reply

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