When fast and furious car racers need to boost horsepower, they often turn to nitrous oxide, or NOS. Likewise, investors looking for dividend yields with a boost in total returns can turn to "NOS" as well.
"N" is National Retail Properties (NYSE:NNN), our "O" is Realty Income (NYSE:O), and the "S" is STAG Industrial (NYSE:STAG). These single-tenant triple-net REITs are all zooming ahead of the S&P 500 pack!
By law, a minimum of 90% of REIT taxable earnings must be distributed to shareholders. In the REIT sector, funds from operations, or FFO, is a key metric used to approximate cash-flow. FFO is basically net operating income adjusted by adding back depreciation expense and some amortizations. Simply put, FFO is the goose that lays the golden dividend eggs income investors are seeking.
In a low interest rate environment many investors chasing yield have turned to the REIT sector which has traditionally offered better returns than the benchmark 10 year Treasury Notes, currently yielding 2.65%.
Most bonds are fixed rate securities that trade inversely with interest rates. When rates are rising, bond prices decline, conversely as rates fall bond prices rise. While owning REIT shares is often viewed as a "bond substitute," that is not the whole story.
Why REIT investors should not focus solely on dividends
The balance of the total return for investors comes from price appreciation of their shares of stock. So far this year, price appreciation of these equity REITs has trumped the dividend yield by a factor of roughly 3x!
Why triple-net REITs?
Landlords lease out properties to tenants who pay contract rent each month. The tenant also pays the taxes, insurance, and almost all of the building maintenance. This results in an income stream that is so reliable some of these REITs can pay out dividends monthly.
More good news!
The single-tenant triple-net business model is the real estate equivalent of the proverbial "cash cow."
1. Most leases contain provisions for bumps up in the rent. These can be an agreed upon percentage, tied to an index like CPI, or even sharing in the success of a terrific retail location through percentage rents.
2. This business model is ideally suited for growing FFO by bolting on acquisitions that are accretive to earnings. This results from the "spread" between a REITs cost of capital and the lease yield derived from the new acquisitions.
In addition, owning real estate can be a hedge against inflation, another advantage over bonds.
NNN-what you see is what you get
The eponymous stock symbol for $4.5 billion market cap National Retail Properties tells investors precisely how the company operates. National Retail currently owns ~1,900 properties spread out over 47 states. This rock-solid REIT has been a publicly traded company since 1984, and has increased its quarterly dividend for the past 24 consecutive years. This steady growth is illustrated in the chart below:
The National Retail portfolio is made up of over 350 tenants, primarily smaller properties such as convenience stores, restaurants, bank branches and gas stations.
Realty Income-The Monthly Dividend Company
What is better than getting paid a competitive dividend each quarter? Getting paid a nice chunk of change each month. Realty Income pioneered this concept, and "The Monthly Dividend Company" is a registered trademark. Realty Income has had 75 dividend increases since 1994!
This $9.7 billion market cap dividend champ owns over 4,200 properties located in 47 states and Puerto Rico:
The Realty Income portfolio has become more diverse since 2009 and now stands at: 77.9% retail, 10.7% Industrial/Distribution, 6.5% Office, 2.5% Manufacturing, and 2.4% Agricultural.
STAG-Single Tenant Acquisition Group
STAG Industrial is the new kid on the block, but it has successfully executed its unique business model since becoming publicly traded in April 2011. STAG focuses on single-tenant, class B, industrial triple-net leased facilities, typically located in secondary markets across the U.S. STAG currently owns 215 properties located in 34 states, containing approximately 40 million rentable square feet.
There are a very limited number of competitors in this space which has resulted in $1.3 billion market cap STAG acquiring properties at a cap rate in excess of 9% -- much higher than its larger peers. Equally impressive is:
- STAG having managed its balance sheet prudently to achieve an investment grade rating.
- STAG shareholders have been rewarded with impressive annual total returns of: 68% in 2012; 20% in 2013; and YTD 2014 returns of 20%.
- STAG not only pays dividends monthly, the company also announces acquisitions on a monthly basis!
The fact that STAG has something to report each month underscores the rapid growth of its industrial portfolio.
National Retail Properties and Realty Income have proven to investors that they could continue to operate profitably and pay dividends during the Great Recession. While STAG Industrial does not have those bragging rights, its ability to maintain a solid balance sheet while growing profitably makes it a very attractive alternative for investors looking for both growth and income.
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Bill Stoller 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.