Realty Income Corporation (NYSE:O) is the largest real estate investment trust, or REIT, specializing in net-leased freestanding retail properties. Simon Property Group (NYSE:SPG) is not only the largest mall REIT, but is the largest REIT of any variety.

Since these two companies are leaders in different types of retail, they are a natural comparison, as they give investors who want to put money into retail real estate two very different strategies to invest in. I last compared the two in February, and since that time, both stocks have dropped considerably -- Realty Income by 7% and Simon Property Group by 14%. With the lower valuations and headwinds facing the brick-and-mortar retail industry, let's take a look to see which is the better buy today.

Retail store front with "closing down" signs in window.

Headwinds in the retail sector have made both of these stocks less expensive. Image source: Getty Images.

Realty Income and Simon Property Group: The 30-second versions

Realty Income primarily invests in single-tenant, freestanding retail properties, which make up about 80% of the company's portfolio by income. The other 20% is primarily composed of industrial and office properties, and the company owns more than 5,000 properties in all, located in 49 states and Puerto Rico.

All of Realty Income's properties are leased to tenants on a long-term, net-lease basis. This arrangement has long initial lease terms (typically 15 years or more) with annual rent increases built in, and tenants are responsible for expenses such as property taxes, insurance, and certain maintenance costs.

Simon Property Group, on the other hand, invests in mall properties, including those under its "Premium Outlets" and "The Mills" brand names. The largest REIT in the market, Simon owns or has an interest in approximately 230 properties with about 190 million square feet of space. Unlike many mall operators, Simon has an excellent track record of treating its tenants as partners, and continually reinvesting in its properties to make sure they keep up with the latest consumer trends. In fact, Simon currently has redevelopment and expansion projects underway at 25 of its properties.

Acquisitions versus development

One major difference between the two companies is their preferred growth mechanisms.

Realty Income grows entirely through acquisitions. The company employs a highly disciplined strategy to research and select attractive properties, and it has spent $9.6 billion on acquisitions since 2010.

While Simon Property Group acquires a property on occasion, the company's main growth engine is ground-up development, which is an additional potential driver of value. Think of it this way -- by building a property for less than its as-completed value, Simon can deliver instant equity to shareholders and earn higher returns than acquisitions could produce.

To be clear, I'm not saying that one method is inherently better. Both companies have produced fantastic returns for shareholders over the years. In fact, over the past 20 years, the total returns of the two stocks are quite close.

SPG Total Return Price Chart

SPG Total Return Price data by YCharts.

What about retail headwinds?

Both stocks take measures to mitigate any risk, but brick-and-mortar retail is facing a lot of headwinds, some of which could potentially affect these companies.

Realty Income specifically selects tenants that are e-commerce and recession-resistant. For example, service-based businesses like restaurants and theaters are naturally immune to online competitors. And discount-oriented businesses like dollar stores actually tend to do better in tough times. However, a small portion of the portfolio could be susceptible to online competition.

In Simon's case, its mall properties could potentially face retail headwinds, but Simon's attractive amenities and state-of-the-art facilities should help mitigate any risks. Still, malls are full of discretionary retail, which is the type of business most likely to run into trouble. One example is Starbucks' recent decision to close all of its Teavana stores, which had been performing poorly, including the 78 located in Simon's malls.

However, it's also worth mentioning that outlet malls (like Simon's Premium Outlet properties) are actually doing quite well, and remain a growing area of retail. In fact, Simon opened four new outlet centers during the second quarter of 2017 alone.

Dividend machines

Both stocks have strong histories of dividend increases, but Realty Income is the clear winner here. The company has increased its dividend for 79 quarters in a row, and has never slashed or skipped a payment. In fact, the company has paid 565 consecutive monthly dividends as of this writing.

In recent years, Simon has increased its dividend at a more rapid pace, but when it comes to long-term dividend investing, consistency is king, and few REITs, if any, have a more consistent dividend track record.

SPG Dividends Paid (TTM) Chart

SPG Dividends Paid (TTM) data by YCharts.

Both stocks have relatively high dividend yields. Realty Income and Simon Property Group yield 4.3% and 4.5%, respectively, based on their current share price.

Valuation

No head-to-head comparison would be complete without a look at valuation, so here's how these companies stack up in terms of price-to-FFO.

Company

Recent Stock Price

2017 FFO Guidance (midpoint)

P/FFO

Realty Income

$59.50

$3.05

19.5

Simon Property Group

$160.17

$11.18

14.3

Data source: Company financials, using adjusted or normalized FFO, when available. Stock prices as of 9/8/17.

Which is the better buy now?

Neither stock is particularly expensive right now, but Simon trades at a significantly lower valuation. To be clear, there's a good reason for this -- Simon is more vulnerable to retail bankruptcies and other headwinds facing the industry.

However, Simon is a top-notch mall operator and once the current retail headwinds blow over, the company should be just fine. Additionally, the outlet side of its business has lots of room to grow.

So, while Realty Income remains one of my favorite stocks, and one of the largest holdings in my own portfolio, if I were to buy one of these stocks today, Simon Property Group looks like the more compelling bargain.

Matthew Frankel owns shares of Realty Income. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.