Real estate investment trusts (REITs) are one of my favorite vehicles for generating passive income. Most of my REIT investments pay above-average dividend yields, giving me a nice stream of cash flow. However, if I had to pick a favorite, it would be W.P. Carey (NYSE: WPC).
Here's why the diversified REIT stands out as a great one for dividend lovers like me.
As attractive a dividend as they come
One thing I love about W.P. Carey's dividend is the yield. At the current stock price, the REIT yields 5.3%. That's well above the REIT sector's average of around 3% and the S&P 500's roughly 1.3% dividend yield.
While a yield that high might seem like a red flag, that's not the case with W.P. Carey's dividend. For starters, the REIT has a reasonably solid dividend payout ratio of 85% of its expected AFFO (adjusted funds from operations) in 2021. While that's higher than some REITs, it's an adequate payout ratio given the overall diversity and durability of W. P. Carey's portfolio. The company owns 1,261 properties triple net leased to 351 tenants across several industries in the U.S. and Europe. Further, it has a diversified portfolio, including industrial real estate and warehouses, offices, retail, self-storage, and others. This portfolio generates very stable income for W.P. Carey.
Meanwhile, the REIT compliments its steady income stream with a solid investment-grade rated balance sheet. Those features give it the financial flexibility to continue expanding its portfolio, primarily by completing sale-leaseback transactions.
That steadily growing portfolio has enabled W.P. Carey to consistently increase its dividend. The REIT has boosted its payout at least once each year since its initial public offering in 1998. Even better, W.P. Carey has given investors a raise every quarter since early 2001. That's one of the longest growth streaks in the sector, as many REITs have had to pause increases or reduce their payouts during a downturn.
There's plenty more income ahead
While W.P. Carey has been a great dividend stock historically, past performance is no guarantee of future success. That said, the company is in a solid spot to continue growing its high-yielding dividend.
As mentioned, it has a solid financial profile because it can use its retained cash after paying the dividend and investment-grade balance sheet to help finance acquisitions. Meanwhile, it can complement those funding sources by recycling capital (selling assets to fund higher returning opportunities) and issuing new stock.
W.P. Carey noted in the first quarter that it's currently executing against one of its strongest deal pipelines in years. As a result, it expects to invest $1.25 billion to $1.75 billion in expanding its portfolio this year. When combined with the embedded rent growth of its existing portfolio, those new additions will help boost its AFFO, giving it more room to grow the dividend.
The company should have no problem continuing to expand in the future, given its broad approach and global reach. Further, W.P. Carey has been increasingly focused on acquiring industrial real estate, which gives it access to that fast-growing sector. The company recently spent $137 million to purchase 2 million square feet of logistics and warehouse space. That brought its year-to-date investment volume above $900 million as the company continues growing its portfolio to support future dividend increases.
A dream stock for dividend lovers like me
W.P. Carey is an outstanding dividend stock. Not only does it offer an above-average yield, but it also has a long history of steadily increasing its payout. That trend isn't showing any signs of stopping, thanks to the company's solid financial profile, durable portfolio, and broad investment opportunity set. That combination of yield and growth is why W.P. Carey stands out as my favorite REIT for generating dividend income.