For an income investor, peace of mind comes from being able to offset monthly expenses with dividend income. This can be easily accomplished by owning monthly dividend stocks. 

There are many advantages to owning stocks that pay out monthly, rather than quarterly dividends. For instance, more frequent payments — 12 payments a year instead of four — simplify household budgeting and make planning more flexible. Another benefit is that monthly dividends stocks are typically less volatile than other stocks. This is because companies must have steady, reliable cash flow to be able to maintain monthly payments. This is why monthly dividend payers are often found in mundane industries such as energy, utilities and real estate, where supply and demand is more predictable. 

But the best benefit of monthly dividend payout is the power of supercharged compounding. Because dividends can be reinvested more frequently, portfolio investments can grow faster, potentially unlocking bigger returns. In addition, if investors use income to buy more shares, then their monthly payments rise, creating more income to reinvest like a snowball effect. 

With all this in mind, I ran a screen for monthly dividend stocks. I found there are roughly 200 companies currently that pay monthly dividends. Three stocks stood out for their steady cash flow, safe dividend coverage and generous yields. Investors looking to save for retirement should be pursuing stocks with these qualities. These are what we here at StreetAuthority call “Retirement Savings Stocks.”

Here are three high-yielding “Retirement Savings Stocks” with monthly payouts…

1. Atlantic Power (NYSE: AT)
Yield: 8%
Atlantic Power is a Canadian utility with a booming U.S. business. The company currently generates about 2,140 megawatts of power mostly from natural gas, which makes up 76% of generating capacity. Atlantic Power’s generating plants are geographically diverse, with assets in western and southeastern United States, Central and Northeast United States, and Canada. 

The company has grown through acquisitions and merged last year with Capital Power Income, thereby almost doubling its size. Atlantic Power now owns 31 generating plants and an 83-mile transmission line in California. It’s in the process of building a 53-megawatt biomass plant and a 300-megawatt wind farm in the United States. The company also owns a majority stake in Rollcast Energy, a biomass facility developer and operator.

Because of rising depreciation charges, Atlantic Power is not currently profitable. But earnings are improving and the company anticipates it will become profitable in 2014. EBITDA, a more important cash flow measure, is rising steadily and has expanded more than 300% from 2009 to anticipated levels of $365 million next year. During the same period, operating cash flow has grown more than 280% to $192 million. 

Reflecting the effects of the merger, cash available for distribution doubled to $72.8 million during the first six months of 2012 from $34.6 million in the same period a year earlier. Payout ratio improved to 89%. With the Capital Power merger also came a 5% hike in the dividend to an annualized rate of $1.16 per share yielding close to 8%. The cherry on top: The company recently started a dividend reinvestment plan allowing investors to acquire new shares at a 3% discount to market price. 

2. Baytex Energy Corp. (NYSE: BTE)
Yield: 6%
Baytex produces crude oil and natural gas from western Canada’s Sedimentary Basin and the Williston Basin in the United States. About 87% of Baytex’s production is weighted toward crude oil, with a particular emphasis on heavy oil. Since 2003, the company has grown its reserve base by a healthy 10% a year to 252 million barrels of proved reserves in 2011. At the same time, Baytex has replaced 269% of its annual production at costs below $10 a barrel.

During the second quarter of 2012, Baytex drilled 38 new wells, found oil 100% of the time and boosted daily production to 53,003 barrels, which is 10% more compared with one year earlier. Net earnings improved 47% in the second quarter to $157.3 million, or $1.32 per share in the same period last year. Baytex has provided full-year 2012 guidance for production ranging from 53,500 to 54,000 barrels per day. which is 10% higher than last year. 

Funds from operations in the second quarter were 10% lower than last year at $125 million, or $1.04 per share, because of falling oil prices, but Baytex still had plenty of cash flow to cover dividends. Payout from cash flow was 64%. The company raised its monthly dividend 10% to 22 cents per share last December and aims to pay out 50% of earnings as dividends, and reinvest the other half in acquisitions and drilling.   

3. Realty Income Corp. (NYSE: O)
Yield: 5%
This retail real estate investment trust (REIT) is a dividend machine and has cranked out 60 consecutive quarters of dividend growth. The latest increase was 2% in September to a $1.82 annualized rate yielding roughly 4.5%. The company’s steady growth is possible because of its diverse property portfolio, consisting of more than 2,800 properties spread across 44 different industries, 144 tenants and 49 states. 

During the 2012 third quarter, Realty Income acquired 87 new properties and announced plans to merge with American Realty Capital Trust (Nasdaq: ARCT). After this deal closes, Realty Income will own a real estate portfolio valued at more than $5 billion.

Realty Income reported a 2% gain in adjusted funds from operation (AFFO) — the actual cash available for distributions — to 52 cents a share in this year’s third-quarter from 50 cents a share in last year’s third quarter, and a 2% year-over-year increase in AFFO for the first nine months of 2012 to $1.52 a share. The company targets AFFO at between $2.06 and $2.11 this year, rising to $2.31 to $2.37 next year. 

Realty Income maintained portfolio occupancy at 97% during the third-quarter. Only 84 of its properties were not leased. With an average remaining lease terms of 11 years and periodic rent bumps built into its leases, Realty Income should benefit from reliable same-store growth for the next decade. 

Risks to Consider: Atlantic Power and Baytex are Canadian companies, which means dividends are subject to Canada’s 15% withholding tax. In addition, share prices may fluctuate with changes in the value of the Canadian loonie versus the U.S. dollar. As a REIT, Realty Income is required to pay out the majority of its income to investors, which makes the company dependent on debt or dilutive equity to fund acquisitions. 

Action to Take –> My top pick for risk-adverse investors is Realty Income. This REIT’s solid fundamentals and consistent dividend growth are hard to beat. Baytex is my top pick for investors who want monthly income and energy exposure. Atlantic Power is a play that combines monthly dividends with an earnings turnaround. 

[Note: “Retirement Savings Stocks” have passed a rigorous screening process. Not only are their yields truly impressive, they must have a track record of safety and gains. Lou Betancourt, co-founder here at StreetAuthority, has put together a detailed report on 10 of these special stocks. If you’d like to see it immediately, just click here.]