Why This Dividend Machine Is on My Buy List

When it comes to dividends, there's no better place to look than real estate investment trusts (REITs), particularly if you own them in a Roth IRA (and who doesn't love tax-free income?) All REITs aren't created equal, though, which is why I only own three today. However, there's one landlord that I've got on my "buy" list because of its dividend record, portfolio diversity, and growth prospects.

Give me a triple!
There are a lot of different types of REITs, but one niche that stands out in my book is the triple net lease sector. These landlords own properties that are, basically, maintained by their tenants. In fact, the tenants pay for almost all of the costs of owning and running the properties. Triple net lease REITs just have to sit back and collect rent. Top-line growth comes from slow but steady rent hikes and portfolio expansion.

(Source: Geoff Livingston, via Wikimedia Commons)

Why would a company want to sign a long-term lease that puts them on the hook for taking care of a property they don't own? Because it removes the financial burden of owning the property from their balance sheet. That, in turn, frees up capital for growth. These companies get to retain control of a property, but without the need to own it. In the end, it's usually a win/win for the REIT and the tenant.

The big guy
Realty Income (NYSE: O  ) is one of the three REITs I currently own. It's a dividend machine, paying a monthly dividend that's been increased for 66 consecutive quarters. It's also a giant, with nearly 4,000 properties. I was lucky enough to buy Realty Income during the 2007 to 2009 recession when it was yielding around 10%. Today it yields closer to 5%.

The so-called "great recession" was a hard time to pull the trigger on a purchase, but Realty Income's track record and long history of dividend increases spoke volumes. Moreover, at the time, it was the king of the triple net lease players. Bigger isn't always better, but in the case of Realty Income it was. Realty was one of the few REITs to make it through the recession with it's dividend track record in tact. Many other REITs either halted their dividend increases or, worse, cut the disbursement.

I continue to like the triple net lease niche and have long fancied W.P. Carey (NYSE: WPC  ) , a REIT that's looking increasingly interesting. For a long time I crossed Carey off my list because it was a landlord but not a REIT. Prior to 2012, the company was structured as a partnership. That didn't sit well with me, and I already owned multiple mid-stream LPs. However, once it converted to a REIT, it was again in play.

Bigger, but not big: Global reach
What's really brought W.P. Carey on to my radar is the company's growth moves over the last few years. When it converted to a REIT, it did so by buying a non-traded REIT that it managed. More recently, it paid around $4 billion to buy another non-traded REIT and expand its portfolio to around 700 properties.

That's small compared to Realty Income, but that's one of the key things I like about W.P. Carey -- small transactions can still have a big impact on the top- and bottom-lines. That's just not true anymore at Realty Income.

(Source: US CIA, via Wikimedia Commons)

The other differentiating factor is that W.P. Carey's portfolio is global. Realty Income and most of the other triple net lease players with any kind of a public track record are largely domestic. Almost a third of W.P. Carey's portfolio is overseas, largely in Europe. That provides diversification and a broader opportunity set.

Not there... yet
So W.P. Carey, with over 50 consecutive quarterly dividend increases, is on my buy list. That's not my watch list... I will own this REIT some day. Why wait? I think it's fairly valued right now with a 5.8% yield. I'm waiting for the fickle market to push the shares even lower. I hope I'm not "lucky" enough for a massive market correction to raise the yield to 10%, but 7% or so isn't out of the question and I think it would represent a good entry point.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 13, 2014, at 12:25 PM, pondee619 wrote:

    "I'm waiting for the fickle market to push the shares even lower. I hope I'm not "lucky" enough for a massive market correction to raise the yield to 10%, but 7% or so isn't out of the question and I think it would represent a good entry point."

    The above comment has always intrigued me. Just as you can't know that the market, or an individual issue, will go up in the short term, there is no way to know if an issue, or the market , will fall in the short term.

    "I will own this REIT some day." You can't possibly know that. Your "must own" stock may never present you with your good entry point at a yield of 7%. Is there an implied Plan B? Or, are you willing to forego the Stock that you "will own someday"?

  • Report this Comment On May 13, 2014, at 5:13 PM, 092326 wrote:

    Benjamin Graham investing philosophy was that a stock should be purchased below 15 times earnings and less than 1.5 times book value or a ratio of less than 22.5. WPC p/e is 28.8 and p/b is 3.2 which results in a ratio of 92.16. It would appear to be pricey at these levels if we are to follow Graham's philosophy.

  • Report this Comment On May 14, 2014, at 8:14 PM, cdb5556 wrote:

    My status is exactly the opposite of yours, Reuben. I am long WPC, and would like to own O as well. I saw you are "wait for pullback" on WPC, how would you feel about O at these levels? buy, sell, hold, and/or wait?

  • Report this Comment On May 15, 2014, at 10:11 AM, pondee619 wrote:

    I don't think Reuben is taking questions.

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