Realty Income (NYSE:O) and Annaly Capital Management (NYSE:NLY) are each known for their juicy dividend yield. But it turns out that another eight-letter word starting with "div" should make you consider one well before you consider the other.
The word? Diversity.
The huge dividends
There's no denying the 5.1% dividend of Realty Income puts it on the watch list of many investors. After all, the company has trademarked itself as "The Monthly Dividend Company," and it has raised its dividend the last 65 quarters in a row.
While it may be lesser known and doesn't have the patented slogan, Annaly Capital Management actually has an even more impressive dividend, with its yield of 10.2%. But it turns out that, even despite the higher yield, the diversity offered by Realty Income has made it the better investment over the past 10 years and will make it the better investment for the next 10 years.
The major differences
While the two are both real estate investment trusts (REITs), meaning, by law, they must pay out at least 90% of their earnings as a dividend, the businesses of the two firms are very different. Annaly Capital is a mortgage REIT that mostly buys and sells mortgage-backed securities issued by Fannie Mae or Freddie Mac. On the other hand, Realty Income is an equity REIT, which means it owns pieces of physical property that other businesses rent.
As a result, the singular focus of Annaly Capital -- 94% of its assets were agency mortgage-backed securities at the end of 2013 -- scares me away; but it's the diversity of Realty Income that draws me in.
The strong diversity
When it comes to property, Realty Income is compelling because its revenue of $214 million through the first three months of 2014 came from properties spanning 49 different states, and even Puerto Rico.
But it isn't the physical diversity of its locations, which is worth noting, but the variety of businesses that actually rent from it. While nearly 80% of the property it owns are retail locations, it turns out that no single type of store makes up more than 10.5% of its income. And, in total, its income comes from a whole host of different industries:
The picture is even more striking when you realize its variety isn't just among the industries of its renters, but the actual tenants themselves. Consider that its top 15 industries represent nearly 75% of its revenue; but its top 15 tenants only make up roughly 45%:
As you can see, the businesses that rent from it are household names that aren't going anywhere anytime soon.
The key takeaway
Mortgage REITs like Annaly Capital have been crushed during the last 15 months because they are so dependent on one singular product -- mortgage bonds -- that have seen their value deteriorate as interest rates have risen. And although Annaly Capital recently announced it would begin acquiring commercial real estate properties, many questions remain about its future.
On the other hand, thanks to its diversity, Realty Income has steadily plugged along, delivering dividend after dividend and growth upon growth. Realty Income's tenant-diversity insulates the company from cyclicality in various industries and allows the company to keep sending those monthly checks.
Is Realty Income the top dividend stock for the next decade?
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Patrick Morris has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.