Better Monthly Dividend Stock: EPR Properties vs. STAG Industrial

Dividend investors are often looking for income to replace a salary in retirement. Buying companies that pay dividends monthly is a great solution, as monthly dividends are as close to a paycheck as you can probably get on Wall Street.

But is it worth reaching for yield with a stock like EPR Properties (NYSE: EPR), which has a 7.1% dividend yield? Or is it better to play it safe with the 4.3% yield that is on offer from fellow real estate investment trust (REIT) STAG Industrial (NYSE: STAG)?

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What does EPR Properties do?

EPR Properties used to be known as Entertainment Properties Trust, which better illuminates the types of properties the REIT owns. Essentially, EPR invests in assets that are meant to bring consumers together into group settings. That includes places like amusement parks, movie theaters, and ski resorts, among many other types of properties. This unique focus is expected to help protect EPR's business from the ongoing transition toward digital life, notably on the retail side of the equation.

Image source: Getty Images.

That said, bringing consumers together into group settings was a terrible focus to have during the coronavirus pandemic. Such businesses were often shut down because they weren't considered necessities. EPR suspended its dividend for about a year to ensure it had enough liquidity to survive and help its customers survive through the pandemic.

The dividend is now back, at a lower level, and growing again. So it did indeed survive, but it is still trying to work itself back into fighting shape.

The big story here is that just over a third of the REIT's rent roll is tied to movie theaters. That business is weaker today than it was prior to the pandemic, with a rent coverage ratio of 1.5x compared to 1.7x in 2019. That said, the rest of EPR's business is stronger, with rent coverage of 2.6x compared to 2.0x in 2019. And, notably, management has been actively reducing its exposure to movie theaters.

In other words, it looks like overall, EPR is moving in the right direction. But there's a cost. Adjusted funds from operations (FFO) fell year over year through the first nine months of 2024 and will likely be notably lower for the full year. Even though the adjusted FFO payout ratio was a solid 66% in the third quarter, leaving ample room to deal with adversity, it seems that investors aren't pleased with the turnaround that is taking shape, given the high yield on offer here.

What does STAG Industrial do?

STAG is a bit more boring. The REIT buys industrial assets and uses a net lease approach, which means its tenants pay for most property-level operating costs. The industrial assets it buys tend to be vital to the businesses that occupy them, and include properties like manufacturing and distribution facilities. Although as it has grown STAG has reached into larger markets, it has a penchant for buying in second-tier markets where competition is lower and it has advantages over what competition there is, which is often smaller landlords.

STAG is a relatively young REIT, but at this point, it has increased its dividend annually for over a decade. The pace of dividend growth has been slow, with a 10-year annualized growth rate of just under 2%. But that, in the end, is better than what investors wound up with if they had bought EPR Properties and suffered through the dividend suspension.

Still, slow and steady, perhaps tortoise-like, is the story that backs an investment in STAG. It won't excite you, but it should keep paying you to stick around.

Which is the better buy: STAG or EPR?

If you need to ensure you have a reliable income stream to pay your bills, you will probably be better off going with STAG. Yes, it means you'll get less income. But the business has proven to be more consistent over time, and the portfolio isn't troublingly overweight in a risky property type. Indeed, only more aggressive investors will want to venture into EPR to collect its higher yield.

That said, EPR is doing the right things to turn its business around, even though it isn't done with that turnaround yet. If you can accept the risk that this poses to your income stream, it might be worth it. But that's only true if you recognize that EPR's portfolio is still a work in progress, and that you'll need to monitor the REIT very closely.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends EPR Properties and Stag Industrial. The Motley Fool has a disclosure policy.