The current retail environment is challenging, to put it mildly. E-commerce players like Amazon are wreaking havoc on many brick-and-mortar retailers. There's been a wave of retail bankruptcies in recent years, and many once-great retail chains like Sears Holdings are struggling to survive.

Realty Income (NYSE:O) and Simon Property Group (NYSE:SPG) are two excellent ways to invest in retail during this difficult time, but for very different reasons.

Family walking through a mall holding shopping bags.

Image Source: Getty Images.

Doing well in a tough retail environment

Realty Income is a good pick primarily because of the type of retailers that occupy its properties. Most Realty Income tenants operate in e-commerce- and recession-resistant types of retail. For example, retailers like Walgreens, Realty Income's top tenant, sell things people need, and often in a timely manner. Discount retailers like tenants Dollar General and Walmart offer bargains that are tough for online retailers -- even Amazon -- to match. And finally, service-based and experiential retailers like LA Fitness and AMC Theatres are naturally immune from e-commerce headwinds.

On the other hand, Simon Property Group is a mall REIT and has many tenants that might seem vulnerable. However, Simon is a best-in-breed mall operator and invests heavily in its properties in order to keep up with the changing environment and keep foot traffic flowing through its malls. For example, Simon has been proactively transforming its malls into mixed-use centers, with nonretail elements like offices, hotels, and apartments, which create a natural source of customers. And Simon has been adding more entertainment options and modern dining facilities, often in the spaces formerly occupied by Sears or J.C. Penney stores. Because of this strategy, Simon's sales per square foot actually increased over the past year, despite the challenging retail environment.

Income considerations

One of the primary reasons people invest in REITs is for income, so let's take a look at how these two companies fare in that department.

Realty Income yields 4.7% and pays its dividend in monthly installments. It's difficult to find a stock anywhere in the market with a more impressive track record -- Realty Income has increased its dividend 98 times since its 1994 NYSE listing and has made 578 consecutive monthly payments.

Simon Property Group has a 4.6% dividend yield and makes quarterly payments. While Simon has increased its dividend aggressively in recent years, it doesn't quite have the historical consistency of Realty Income. As you can see in the chart below, the path to the current dividend wasn't straight up, especially around the time of the financial crisis:

SPG Dividend Chart

SPG Dividend data by YCharts.

So while both of these are excellent income stocks, Realty Income has the clear edge when it comes to investors seeking consistent, rising income.

Valuation

The best way to value a REIT is in terms of its funds from operations, or FFO. Traditional "earnings" don't really apply to REITs -- without getting too complicated, they don't do a great job of accurately conveying the amount of cash generated from real estate investments.

With that in mind, here's a look at how these two REITs stack up side by side:

Company

Recent Stock Price

2018 FFO (guidance)

P/FFO (midpoint of guidance)

Realty Income

$56.16

$3.16 to $3.21

17.6

Simon Property Group

$175.72

$12.05 to $12.13

14.5

Data Source: Company earnings releases. Prices as of 9/28/18. Adjusted or normalized FFO is used when available.

So on the surface, Realty Income is the more "expensive" stock. However, there's a good reason. The company was built for predictability and reliability, and that's what it has provided year after year. On the other hand, Simon has a bit more volatility risk, especially given the problems facing some of its tenants right now.

To be clear, I think both companies will do very well over the long run. I just feel that Realty Income's path will be a much smoother one, and that's certainly worthy of a valuation premium.

The verdict

I don't think investors will go wrong with either stock over the long run, as both have the potential to produce market-beating total returns. And Simon's valuation makes it a particularly compelling investment at the current price. I place tremendous value on consistency and reliable dividend growth, which is why Realty Income is one of the largest stock holdings in my own portfolio.

However, I'm inclined to call this one a toss-up, and it depends on your own preferences. If you have the stomach to handle a little more volatility, Simon looks like the better deal. On the other hand, if you're like me and like to watch your income consistently increase over time and want to worry as little as possible about your investments, Realty Income is probably the way to go.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP owns shares of Realty Income. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.