Which of These Dividend Giants Are Right For You?

Realty Income and American Realty Capital are the big boys of the triple net lease space; which one should you buy?

Apr 3, 2014 at 8:00AM

When it comes to dividends, few companies can match the performance record of Realty Income (NYSE:O). However, American Realty Capital Properties (NYSE:VER) has used acquisitions to leapfrog Realty Income in size, has a higher yield, and appears dedicated to regular dividend hikes. Maybe the newcomer is the better option...

A great asset class
REITs are great for income investors. By design they pass through 90% of their earnings to shareholders as dividends. The downside is that REITs don't pay taxes, so you have to treat REIT dividends like regular income.

The triple net lease sub-sector, meanwhile, is particularly enticing. These properties are generally single tenant, have long-term leases with regular rent hikes built in, and, here's the best part, the lessee generally pays for all of the property's expenses. Essentially, the only thing the REIT has to do is find good properties and tenants -- after that it can sit back and let the rent checks roll in.


(Source: GeorgHH, via Wikimedia Commons)

Wow, what a record...
This explain why Realty Income has been able to increase its dividend every quarter for 66 consecutive quarters. Since going public in 1994, the company has increased its dividend, paid monthly, 75 times. That's like getting a paycheck every month -- with quarterly raises!

American Realty Capital only came public in late 2011, so it can't possibly match that record. However, it's learned from the master. Like Realty Income it pays dividends monthly and has already started to build a solid record of quarterly increases. So, at this point, every indication is that the two are on par with regard to dividend hikes.

The big difference is yield. Realty Income's yield is around 5.3% while American Realty Capital's is about 7%. Why the nearly two percentage point difference? For starters, American Realty Capital is still a relatively young and unproven company. Oh, and in under three years it has grown from less than 100 properties to over 3,700. Realty Income's portfolio is roughly the same size, but was built over decades, not months.

But size has its limitations
If you are looking for yield, the potential for indigestion at American Realty Capital may be worth the risk. More conservative types should probably stick with Realty Income. One thing to keep in mind with both of these big boys, however, is that growth gets harder to achieve the larger you get.

Sure, Realty Income and American Realty Capital have great (and really big) portfolios to support current dividends, but how fast will they be able to grow distributions? After all, buying a handful of properties would be just a drop in the bucket for this pair. These two giants could actually be at a dividend growth disadvantage compared to smaller players like National Retail Properties (NYSE:NNN) and W. P. Carey (NYSE:WPC).

Pictofigo Growth

(Source: Pictofigo, via Wikimedia Commons)

National Retail has a 24 year history of annual dividend increases and owns over 1,800 properties. It's a great company, but offers the lowest yield of the group at around 4.8%. This is one to keep on your radar for a sell off. Even if portfolio growth could have a more meaningful impact on the dividend, its premium yield appears to price that in already.

Carey, meanwhile, just announced its 52nd consecutive quarterly dividend hike and has about 1,000 properties. Thus, smaller acquisitions can still have a big impact on the top and bottom line. And, unlike most triple net lease competitors, Carey has a global portfolio, affording it even more avenues for expansion. The shares yield about 5.8%, which makes it a solid alternative to Realty Income based on yield and growth prospects. And, with a 40 year history it affords the security that American Capital Properties lacks because it's still, time wise anyway, just a baby.

High yield, more risk
In the end, if you can stomach some added risk, American Realty Capital is the clear triple net lease favorite. If you are more conservative, Realty Income has a more impressive history to go off of. But, W.P. Carey might be a better option because its relatively small size and global diversification are likely to afford it more opportunities to grow, and grow its distribution.

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Reuben Brewer has a position in Realty Income. 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.

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