This Monthly Dividend Strategy Has Outpaced Realty Income

What if I told you I had a stock that has outperformed Realty Income (O 0.95%) over the last five years? One that will give you similar exposure to property owners, but is more diverse. Not to mention, it pays a monthly dividend just like Realty Income.

I'm talking about W.P. Carey (WPC 0.36%), National Retail Properties (NNN 0.76%), and Extra Space Storage (EXR 0.21%). OK, so it's not one stock, it's three, but check this out:

Source: Nasdaq.com.

Instead of investing, say, $9,000 in one company that pays a monthly dividend, an alternative strategy is to split it into three $3,000 investments with quarterly payouts. By doing so, you effectively create your own monthly dividend.

Let's dig into this a little deeper.

Similar exposure
Realty Income is a real estate investment trust that primarily owns retail properties. One key to its success is focusing on strong tenants in reliable industries. This helps to ensure tenants can cover rental payments. 

National Retail Properties is similar. In fact, a comparison of the companies' top tenant industries shows the crossover in strategy and holdings.

Because many of these industries provide either necessities or operate at the lower end of the pricing spectrum, it seems reasonable to assume that their bottom lines are less affected by swings in the economy. Focusing on such properties has enabled Realty Income to create a steady cash flow and increase its dividend for the last two decades.

With the exception of dollar stores, National Retail Properties gives investors similar exposure to the same stable retail industries. While only a handful of other REITs can match Realty Income's track record of raising its dividend for 69 consecutive quarters, National Retail properties is one of them. 

High occupancy 
Another key to Realty Income's success is keeping occupancy high, as vacant properties don't create cash flow. In fact, tenant occupancy has never fallen below 96% during the company's 49-year history. 

Although management deserves credit for this success, it's also a product of using sale-leaseback transactions to acquire properties, and of signing tenants to long-term leases.

By buying properties and then leases them back to the seller, both parties win. The original owner (now tenant) frees up capital that was tied up in real estate; Realty Income gets an already occupied property with a tenant willing to sign a long-term lease.

While W.P. Carey has only been a REIT since September 2012, it uses the same strategy, which has kept occupancy above 98%. 

The big difference between the two companies is that W.P. Carey invests more heavily in office and industrial properties -- although it owns retail as well. Also, 32% of the company's investments are properties located in Europe. For some, this might mean more risk; for me, it simply means more opportunity. 

More important, by leveraging the sale-leaseback model, W.P. Carey is likely keep its occupancy high and, by implication, its cash flow consistent.

Efficiency  
By owning a portfolio of self-storage properties, Extra Space Storage sticks out like a sore thumb in this group of companies. However, in terms of profitability, Realty Income and Extra Space Storage are cut from the same cloth.  

One of the best ways to judge this is by looking at return on equity, which measures how efficiently a company generates earnings. However, instead of using the traditional formula -- net income divided by total equity -- I will substitute net income with funds from operations, or FFO, which pulls out depreciation of real estate and offers a better idea of true cash flow.  

Producing a consistently high return on equity means management is finding attractive financing and making quality investments. Extra Space Storage has done just that; and by operating in a stable and growing industry like self storage, I expect its strong performance to continue. 

Three heads are better than one
I am a firm believer that owning more stocks is not always better or safer. In this case, however, you get three stocks that combined for an average return of 319% over the last five years, compared to 137% for Realty Income. You also get a comparable average yield of 4.1% versus 4.4% for Realty Income. Lastly, you get stronger geographic diversity, as well as much more diversity across property types. 

Ultimately, I think the combination of National Retail Properties, Extra Space Storage, and W.P. Carey creates one of the best monthly dividend stocks you can buy today.