There are few real estate investment trusts (REITs) that can match the dividend histories that National Retail Properties (NYSE:NNN) and Realty Income (NYSE:O) have achieved. Both have more than 25 years' worth of annual dividend increases under their belts, putting them into the rarefied Dividend Aristocrats space. And while each is a very well-run company, Realty Income is a better choice for dividend investors looking to outpace the ravages of inflation over time via dividend growth. Here are three reasons why.
1. Expensive is bad...and good
Before any investor decides to buy National Retail Properties or Realty Income, one big caveat needs to be stated right from the start. These two industry bellwethers are expensive.
Realty Income has a price-to-adjusted-funds-from-operations (AFFO) ratio of 23, using projected 2019 AFFO figures. FFO is the equivalent to earnings for REITs. Although slightly lower, National Retail Property looks rather expensive, too, with a price-to-AFFO of 20. Those are figures you would expect from high-growth stocks, not slow-and-steady dividend payers. Both of these REITs have historically low dividend yields today, too.
All in, National Retail looks a little cheaper than Realty Income. But investors with a value bias or those focused on generating as much income as possible from their portfolios would be better off sitting on the sidelines right now and waiting for a better entry point. However, there's also a benefit to the high multiples here.
REITs have to push out most of the cash they generate to shareholders in the form of dividends. Money to fund growth spending has to come from the capital markets via equity and debt sales. The current high multiples coupled with the low interest rate environment means that cash for acquisitions is relatively cheap for Realty Income and National Retail Properties right now. In fact, both have been tapping the capital markets and making acquisitions. Realty Income has been particularly active. This suggests that the impressive dividend streaks these two companies have going will continue. And Realty Income's higher valuation may actually give it an edge when it comes to raising capital via stock sales today.
2. A little means a lot
That said, neither National Retail Properties nor Realty Income will excite you on the dividend front. Both basically offer slow-and-steady growth, but there's one notable difference to keep in mind. Over the past decade, Realty Income's dividend has grown at an annualized rate of 4.5%, easily besting the long-term average of inflation growth (around 3%). That means a shareholder's buying power has grown over time.
National Retail Properties has a 10-year annualized dividend growth rate of 2.8%. Growth has been higher over more recent periods, inching into the 4% range, but historically speaking, Realty Income has a better dividend track record when it comes to dividend growth.
That history, meanwhile, is far more important than the tiny difference in the yields today. Yes, National Retail Properties' 3.7% yield is a touch higher than Realty Income's 3.6%. But once you consider historical dividend growth, Realty Income comes out on top.
3. More ways to play
The next thing to consider when comparing National Retail Properties and Realty Income is a big-picture issue. Both own single-tenant net lease properties, in which the lessee pays most of the costs of the property. However, National Retail is highly focused on the retail space, as its name implies. It is predominantly a U.S. property owner. This isn't good or bad, per se, but it means that the REIT has only one way to grow its business. Weakness in the U.S. retail sector could also have a material impact on its business.
Realty Income has a focus on retail assets as well, with roughly 82.5% of its rents coming from these types of properties. But it also has exposure to industrial (11.8% of rents) and office (3.8%) assets. In addition, it recently made its first investment outside of North America, buying a dozen grocery stores in the United Kingdom. That investment, while relatively tiny today, should provide a long-term platform for growth in a new region. The big takeaway here is that Realty Income is more diversified, which should give it more avenues to grow over time and help protect it from property-type headwinds in any individual subsector. The diversification in Realty Income's portfolio makes it a more compelling choice for most investors.
A better option
To be fair, National Retail Properties and Realty Income are both extremely well-run REITs. You could probably flip a coin here and be OK, noting the pros and cons of the high multiples at which each is trading right now. That said, when you dig a little deeper into their past dividend records and present portfolio compositions, Realty Income comes out on top with a slightly better history of dividend growth and a more diverse property lineup. If you are looking at this pair of bellwethers, paying a little more for Realty Income looks like the better call.