National Retail Properties (NYSE:NNN) is one of two real estate investment trusts (REITs) in the net lease space that can claim bellwether status. It has rewarded investors with annual dividend increases for decades, building a large and diversified portfolio of single-tenant retail assets along the way. But there's one very big problem that dividend investors need to know about before they buy this stock. 

There's a lot to like

National Retail's portfolio contains roughly 3,000 single-tenant retail properties spread across 48 states. Its largest exposure is to convenience stores (about 18% of rents), full-service restaurants (11%), auto service (9%), quick-serve restaurants (9%), and family entertainment centers (7%). 

The acronym REIT on a binder with the words real estate investment trust below it

Image source: Getty Images.

This breakdown is notable for a couple of reasons. First, you could arguably merge auto service and convenience into a "gas station" category accounting for around 27% of rents, and the other three could be pushed together into a "restaurant" group clocking in at roughly 27%. So together, those two broad groups are about half of the REIT's business. Before you start to worry, note that all of these property types are somewhat insulated from online competition since they are necessity- and experience-based.

So while there's a bit of concentration in National Retail's portfolio, it is arguably in desirable sectors. Now add to that occupancy of nearly 99% and an average remaining lease term of over 11 years. And don't forget the core of the net lease approach is that lessees pay for most of the costs of operating a property (like taxes and maintenance). National Retail appears to have a very solid underlying business in today's retail market, where once-strong niches are getting disrupted by the growth of online shopping.   

And that's not the end of the good news. National Retail also has an investment-grade balance sheet and three decades of annual dividend increases under its belt. The REIT's adjusted funds from operations (or FFO, roughly akin to earnings for an industrial company) payout ratio, meanwhile, is a solid 70% or so. Investors should like what they see in this landlord.   

The very big problem

So it is hard to deny that National Retail is a great company that has rewarded investors well for a very long time. But there's one important fly in the ointment: The dividend yield is roughly 3.6%. Although that's a lot better than the approximately 2% you would get from an S&P 500 index fund, it happens to be very close to the lowest yield the stock has ever offered. Which brings us to the stock price, which is near the highest in the company's history. 

NNN Chart

NNN data by YCharts.

Put simply, National Retail Properties looks very expensive today. Confirming that is a look at the REIT's price to projected 2019 adjusted FFO multiple, which sits at roughly 20. That's a number you would expect from a growth stock, not an income stock that is known for its tortoise-like qualities. For example, while the dividend has been raised for decades, the annualized dividend increase over the past 10 years has been just under 3%. Over the past few years, that's ticked up to between 4% and 5%, but still not what you would call huge dividend growth. Yes, National Retail will, over time, keep your income stream in line with or slightly ahead of inflation, but paying 20 times adjusted FFO for that seems a bit excessive.   

Worth watching, but...

Essentially, to paraphrase value investing icon Benjamin Graham, a good company can be a bad investment if you pay too much for it. It is hard to argue that National Retail is a bad company, but unfortunately, it is also very difficult to argue that it is anywhere near a bargain price today. Quite the opposite, in fact: It appears priced for perfection. And thus, most investors should put National Retail Properties on their wish list, not their buy list.