A lot has changed in the real estate investment trust (REIT) space since positive coronavirus vaccine news led to a big sector rally. One notable change has been in the relative appeal of net-lease players Realty Income (NYSE:O) and STORE Capital (NYSE:STOR) -- and a new pick for the better buy of the two.
Did something big happen?
The honest truth is that not much has actually changed in the world at this point. Yes, the announcement that Pfizer and partner BioNTech have had material success with their vaccine trials is great to hear. The fact that this news was buttressed by an equally compelling update from Moderna is even more exciting. But the truth is that a vaccine still needs to be approved, mass produced, and widely distributed before it's going to have a material impact. That's likely months, if not quarters, away. In the meantime, the world is dealing with a flare-up of COVID-19 cases.
That hasn't stopped investors from changing their stances on stocks, however, including Realty Income and STORE Capital. In the week or so since that the Pfizer news was announced, the average real estate investment trust stock, as measured by Vanguard Real Estate ETF, was up about 8%. Realty Income stock rose roughly 11%. And STORE Capital's stock rallied nearly 20%. That outsized advance has brought the dividend yields of these two net-lease REITs roughly in line with each other at around 4.4% or so.
That materially changes the investment math for dividend investors. Indeed, not too long ago STORE Capital had an income edge -- but with the yields so close, most investors considering this pair of REITs will probably be better off with Realty Income at this point. But a quick rundown on key similarities and one key difference will help explain why.
Similar in so many ways
Realty Income and STORE Capital are both net-lease REITs, which means they own single-tenant properties, and their tenants are responsible for most of the operating costs of the assets they occupy. It's a fairly low-risk niche of the real estate sector that generally involves long-term leases with regular contractual rent increases. Realty Income is the larger of the two companies, with over 6,500 properties. But STORE Capital is no small fry, owning just shy of 2,600 buildings.
Each company has a heavy focus on retail-oriented assets. Realty Income's portfolio is broken down between retail (about 85% of rents), industrial (10%), office (3%), and other (2%, largely an opportunistic vineyard investment). Realty Income gets around 4% of its rents from the United Kingdom. STORE Capital's breakdown is a little more nuanced, with service (63% of rents), retail (19%), and manufacturing (18%). The thing is, the service and retail components are pretty much what Realty Income would call retail. So, at the end of the day, their portfolios are more similar than dissimilar.
Both also have solid histories of annual dividend increases, including in 2020 while the COVID-19 pandemic was leading some REIT peers to cut dividends. But this is also where the big difference shows up. STORE Capital has only been public since 2014, so 2020 was the company's first big test. It appears to have passed with flying colors, extending its annual dividend increase streak to six years. Realty Income has been around just a little bit longer, with its dividend streak now an impressive 28 years long.
Since Realty Income and STORE Capital are so similar and their yields so close right now, most investors should probably lean toward the one with the more impressive history at this point. That's not a knock on STORE Capital, which has proven that its model works during these troubled times. But if dividend consistency is important, there are few companies that can stand toe to toe with Realty Income.
Just one more thing
All in all, if you are looking at just STORE Capital and Realty Income, the latter looks like the better option today -- it has been around for much longer, and lived through more than a single turbulent period. But dividend investors willing to look just a little bit further afield might find net-lease peer W.P. Carey even more enticing. It has 23 years of annual dividend increases under its belt, a yield of nearly 6%, and a far more diversified portfolio. In other words, Realty Income is a solid option, but maybe not the only one you should consider.