Real estate investment trusts (REITs) are designed to pass income on to investors and, for the most part, doing that reliably should be a key measure of their performance. All three of these REITs increased their dividends in 2020, despite the coronavirus headwinds they faced. But that's not the only reason to like them. If you're looking for a safe REIT to buy in July, here's why you should take the time to examine Realty Income (NYSE: O), National Retail Properties (NYSE: NNN), and W.P. Carey (NYSE: WPC).
1. Net lease
One of the first reasons to like this trio of REITs is that they use the net lease approach. Essentially, they own the properties, but their tenants have to pay for most of the day-to-day costs of the buildings they occupy. It's a vast oversimplification, but Realty Income, National Retail, and W.P. Carey only have to collect their rents, making the difference between their cost of capital and the rents they collect. It's a fairly low-risk way to invest in real estate.
2. Size matters
Realty Income is the biggest name, by market cap, in the net lease sector, with a portfolio of roughly 6,600 properties. However, it's about to get even bigger, given its pending acquisition of peer VEREIT. Following the deal, Realty Income will have around 10,300 properties. W.P. Carey is the No. 2 name, by market cap, and National Retail is around the fifth largest. Size has advantages in the net lease space, given that cost of capital is so important. This trio generally has the ability to tap the capital markets at attractive rates whenever they want.
3. Some key differences
That said, Realty Income, National Retail, and W.P. Carey are not interchangeable names. National Retail is 100% focused on owning domestic single-tenant retail properties. At the other extreme is highly diversified W.P. Carey, with a portfolio spread across the industrial (25% of rents), warehouse (22%), office (22%), retail (18%), and self-storage (5%) property sectors ("other" rounds things out to 100%). In addition, roughly 38% of W.P. Carey's rents come from outside the United States (largely Europe). It's one of the most diversified REITs you can buy.
In the middle of those two sits Realty Income, with a portfolio that's 84% retail, 11.5% industrial, and 3% office, with the balance in an opportunistic vineyard investment. Roughly 7% of Realty Income's rents come from the United Kingdom. In other words, Realty Income sits somewhere between National Retail and W.P. Carey on the diversification front, noting that after it consummates the VEREIT deal, it plans to spin off its office properties into their own company. Depending on your opinion of diversification, which you know is good for your portfolio, you may find one of these three more to your liking than the others.
4. The dividends
There's no question that 2020 was a very difficult year, but all three of these REITs increased their dividends. That said, National Retail's exclusive focus on retail assets was a notable headwind, and it hiked its dividends in the third quarter like it usually does, but by just a half a penny a share. It was really a statement to investors that management believed in the strength of its long-term approach.
Realty Income and W.P. Carey both increased their dividends in each quarter of the year. However, the increases were fairly modest, too, with Realty Income hiking just seven-tenths of a cent between the start of the year and the end, and W.P. Carey upping its dividend eight-tenths of a cent. Again, it was the statement that was important, as all three were telling investors that, even during a global pandemic, they were operating as if it were business as usual.
However, that's just one year. W.P. Carey is on the verge of becoming a Dividend Aristocrat, with a string of 24 consecutive annual dividend increases since its IPO in 1998. Both Realty Income and National Retail are Dividend Aristocrats, with annual streaks of 26 years and 31 years, respectively. Put simply, history suggests that dividend investors can trust, even during major market dislocations, that their dividend checks will keep showing up.
Investors are well aware of the pros and cons here, noting that the pros are very attractive. In other words, these REITs don't often trade at discount prices. Right now, Realty Income's dividend yield is around 4.1%, which is around the middle of its historical yield range over the past decade. National Retail's roughly 4.4% yield is about the middle of its recent range as well, though much lower than it was during the worst of the pandemic-driven bear market when investors feared its exclusive retail focus would be a major liability. In other words, it was probably a really good buy last year, but less so today.
W.P. Carey, meanwhile, offers a yield of 5.4%, which is also about middle of the road. Before jumping on the highest yield, it's important to note that W.P. Carey has more exposure to below-investment-grade tenants, and office properties are generally more costly to own (which is why Realty Income is spinning them off after the VEREIT deal closes).
That said, the higher yield is probably worth the modest extra risk for investors looking to maximize their income. From a pure income safety standpoint, however, Realty Income probably comes out on top.
One should be right for you
At the end of the day, Realty Income, National Retail, and W.P. Carey have all proven they can provide reliable dividends to investors, which is the main reason why REITs exist. There are important nuances between them, but each is built on a solid net lease foundation. One, or more, will likely end up being attractive to dividend investors in search of a safe REIT. However, none is exactly cheap right now, though paying a fair price for a good company is probably worth the price of admission with this trio.