If you're a dividend investor, a high yield is certainly nice to have. However, a high dividend yield that also grows consistently over time is even better, and when the stock has the potential to generate market-beating returns, as well, and to do it safely, that's the trifecta. One stock that checks all of these boxes is National Retail Properties (NNN 0.25%), a real estate investment trust (REIT) that focuses on a specific type of retail property.
What National Retail Properties does
National Retail Properties is a "net lease" real estate investment trust. There are several other companies that specialize in net-lease properties, but National Retail is the largest pure-play retail net-lease REIT.
Image Source: Getty Images.
As of June 30, 2017, National Retail Properties owned 2,675 properties located in 48 U.S. states. The company focuses on single-tenant retail properties. To give you an idea of the types of businesses that occupy these buildings, National Retail's top tenants include companies such as Sunoco, Camping World, SunTrust, and BJ's Wholesale Club, just to name a few.
If you're not familiar with the concept of net-lease real estate (also referred to as triple net), it basically refers to a leasing arrangement that requires the property's tenants to cover variable expenses, specifically property taxes, building insurance, and certain maintenance costs. There are several variations of a net lease, such as a "single net" lease that only requires a tenant to cover property taxes, but triple net is the most commonly used among freestanding commercial properties. Typically, triple-net leases have long initial terms (10+ years) and have annual rent increases, or escalators, built in.
Net-lease retail is healthy and on sale
Despite the general pessimism regarding the brick-and-mortar retail industry, not all retailers are suffering from e-commerce disruption. In fact, some areas of retail are relatively immune to e-commerce headwinds and are also quite recession-resistant.
Specifically, businesses that sell items that people need, provide a service as opposed to a tangible product, or sell items at deep discounts, don't have much to worry about. As an example, restaurants (19.5% of the company's portfolio) provide a service that can't be duplicated by online retail. The same can be said for fitness centers and theaters, two other major property types owned by the company.
To illustrate this, consider that National Retail just reported core FFO (funds from operations, the REIT version of earnings) growth of 8.5% year over year and an impressive 99.3% occupancy rate, the highest it's been in well over a decade.
Image Source: National Retail Properties investor presentation.
National Retail Properties also has the advantage of financial strength and flexibility. The company has a strong balance sheet, an investment-grade credit rating (BBB+/Baa1), and has the financial flexibility to pursue attractive opportunities as they come up. During the second quarter alone, the company invested nearly $300 million in acquisitions at attractive initial yields.
While there's no reason to believe National Retail Properties' business is in any sort of danger, its stock price has been beaten down, thanks to the general weakness in the retail sector. In fact, the stock is down nearly 24% over the past year, despite the company's strong results and healthy portfolio.
Steady, predictable dividends
The result of the stable net-lease structure and recession- and e-commerce-resistant property portfolio is a steady, predictable, and growing stream of income. This is what makes National Retail an excellent choice for income investors who also hope to achieve long-term growth.
National Retail recently declared a 4.4% increase in its dividend, which gives the stock a 4.8% annual yield at the share price as of this writing. This is the company's 28th consecutive annual dividend increase, which is extremely impressive considering the turbulent events that have gone on in the stock market during that time -- including a crisis that directly affected real estate.
Image Source: National Retail Properties investor presentation.
The Foolish bottom line
To sum it up, National Retail Properties isn't just another risky retail stock. The company has a rock-solid portfolio that has little to worry about from e-commerce or recessions, and this has translated into a consistently growing stream of income for shareholders. If the recent results are any indicator, there's no reason to think this will change anytime soon, and because many (other) brick-and-mortar retail businesses are facing tough times, National Retail is selling at a discount right now.
