These Dividend Rock Stars Will Deliver Returns Even With Rising Interest Rates

With the fear of higher interests rates in the future, triple-net lease REITs are still a good choice for stable returns.

Jan 27, 2014 at 12:07PM

There's been a lot of turmoil and uncertainty as the Federal Reserve begins to slowly pull back its bond-buying program. But income-oriented investors looking for solid dividends should still have confidence in the returns potential of triple-net lease REITs.

There are three triple-net lease REITs I believe we need to address in particular. They are Realty Income (NYSE:O), National Retail Properties (NYSE:NNN), and WP Carey (NYSE:WPC). All three have a long track record of strong dividend performance and give different exposure to the sector.

Ben Bernanke's big announcement
The world of income-minded investors was thrown for a loop on May 22, 2013. Fed Chairman Ben Bernanke suggested that he might begin tapering the central bank's monthly bond buying program. Almost immediately, investors started jumping out of bonds. But it wasn't just the bond market that took a hit -- real estate investment trusts (REITs) got hammered as well.

The REIT market is very sensitive to interest rate movements because everyone from developers to builders depend on borrowing. As evidence, the FTSE NAREIT index hit its peak the day before Bernanke's announcement. Fast-forward to November, and REIT shares had collectively lost about 11%. 

Yet all income vehicles are not created equal, and the REIT sell-off was probably premature. I believe Fed tapering should be looked at as a warning for bonds, but an opportunity in the REIT market.

Why REITs will be better than bonds going forward
Income may be the name of the game, but REITs and bonds are two totally different instruments. If you own a bond, you become a company's creditor. Bondholders receive interest payments and get their principle back. REITs deal in tangible assets, real estate, which can gain value. In order to pay no corporate taxes, REITs must pay out at the very minimal 90% of their taxable income as dividends.

Many experts in the REIT industry believe the hit took after the tapering announcement was unfounded because rising interest rates are a catch-22 for REIT investors.

In a recent interview with CoStar News, Brad Case, VP of Research with the National Association of Real Estate Investment Trusts (NAREIT) stated, "Because the truth is, when interest rates go up, it usually means the economy is strengthening. That's good news for REITs and means that returns will be strong." 

During the last REITWorld conference in San Francisco, one of the industry's biggest professional conferences, NAREIT backed up its vice president's claim with analysis that shows REITs have performed well in 12 out of 16 periods of interest rate increases since 1995. 

What complicates the market is that REITS are not a one-size-fits-all industry. There are so many sub-sectors with their own little nuances that generalizations can't be made across the board. And that's a good thing for income investors. One of these sub-categories is gaining steam on the investment front because of its stable stream of income that doesn't seem to be affected by rate movements or economic changes.

Triple-net lease REITs: Solid enough to withstand rising rates or tough economy
A triple-net lease is a lease agreement where the tenant of a commercial building is required to pay for net real estate taxes, net building insurance and net common area maintenance on the property. Paying those three costs is how the contract got its name.

Since the tenant is paying for the costs usually taken care of by the owner, the tenant is charged a lower rent than that of a standard agreement. In REIT terminology, this translates into a stable income stream with minimal operation costs. That gives the investor higher and more predictable dividends.

Another plus for this sector of REIT is the strength of its tenants. Triple-net leases deal with the Walgreens, Wal-Marts, and Dollar Generals of the world. They own and invest in these types of retail giants over long contractual periods -- and these companies are well-equipped to weather most economic storms. 

NAREIT has put out data that triple-net REITs distribute some of the largest dividends -- around 4.66% -- in the equity REIT sector. 

Three different ways to play this REIT sector
Realty Income, commonly referred to as the "Monthly Dividend Company," is on a roll -- it's increased its dividend 19 years in a row and is now yielding 5.7%. It is arguably the major player in this sector. The company has a real estate portfolio of over 3,800 commercial properties in 49 U.S. states and Puerto Rico. The majority of its tenants have high credit ratings like FedEx, Walgreens, and Family Dollar.

National Retail Properties has paid and increased its dividend for the last 24 years. It owns 1,850 properties in 47 states and differentiates itself by concentrating exclusively on "small-box retail" and owning smaller transactions -- and it dominates that market. 

For 15 straight years, WP Carey has paid and increased its dividend. W.P. Carey owns and manages an investment portfolio worth more than $15 billion. It concentrates on long-term sale-leaseback and build-to-suit financing for companies and has a strong international presence. 

These are three different plays in the same sector of REITs, and these companies were sound enough to distribute and increase their dividends during the last recession. I believe they should have no problem doing the same thing in an improving economy.

How you can rob Wall Street
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. Our analysts have done it before with the likes of Amazon and Netflix. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Fool contributor Jason Jenkins has no position in any stocks mentioned. The Motley Fool recommends and Netflix. The Motley Fool owns shares of and Netflix. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers