There's a phrase sometimes heard in the investing community that goes "you can't fake cash." While a fraudulent company can cook its books to hide losses and make itself look more profitable than it is for a period of time, it's a different story when it comes to paying a dividend. A company either has the excess cash and ability to pay a dividend or it doesn't.
Companies that can consistently generate that excess cash year after year and even increase it consistently eventually earn a coveted designation that tends to attract income-focused investors. These dividend stocks that are members of the S&P 500 and have raised their annual dividend for at least 25 straight years join a somewhat exclusive club called the Dividend Aristocrats.
One stock on the cusp of joining this elite group is the real estate investment trust (REIT) W.P. Carey (WPC 0.49%). Let's take a look at three reasons you should consider buying this soon-to-be Dividend Aristocrat before it qualifies.
1. W.P. Carey has an enviable track record
W.P. Carey traces its roots back to founder William Polk Carey, who in 1973 developed an idea to pool net-leased commercial real estate assets in such a way that individual investors could pool their money together to own them as a team. This shared ownership of countless properties would be less risky than an investor going it alone by putting all of their money into just a single property or two that they could afford. By 1998, this real estate investment trust became a publicly traded company.
When W.P. Carey's operations went public, it also started paying a dividend to shareholders (REITs are required by law to pay out at least 90% of their taxable income to shareholders). Since then, the company has raised its dividend each year without fail, placing its current streak of increasing its dividend at 23 consecutive years. With W.P. Carey raising its dividend during the last few weeks of each quarter in smaller increments, this means that the company will likely reach Dividend Aristocrat status by March of 2023. And for a stock on the verge of becoming a Dividend Aristocrat, W.P. Carey offers income investors a massive 5.5% dividend yield that is set to grow in the low-single-digit percentages each year.
2. W.P. Carey has a strong and diversified business model
W.P. Carey is a triple net lease REIT, this means that the company rents out its 1,264 properties to a variety of tenants throughout the U.S. and Europe. Those tenants are responsible for cutting a base rent check each month and paying all of the costs of the properties they rent, including property taxes, building insurance, and maintenance, as well as utilities.
And what makes W.P. Carey's business model even better is that its weighted average lease term (WALT) is more than a decade (currently 10.6 years). Long lease terms and the earnings stability and visibility that they provide are among the reasons the stock is able to consistently raise its dividend.
Another reason to love W.P. Carey's business is that it comes with built-in protection against inflation. For example, 59% of the company's annualized base rent (ABR) comes with lease or rent escalators linked to the consumer price index (CPI) to keep up with inflation. And another 36% of lease contracts have fixed rent increases attached, which could come in at, above, or below the rate of inflation.
The third factor that has helped W.P. Carey reward its shareholders with steady dividend increases is that the company isn't too reliant on any industry in case an industry falls on hard times. This is evidenced by the fact that industrial properties accounted for 25% of ABR, warehouses chipped in 24%, offices contributed to 21%, and retail made up another 17%.
3. W.P. Carey stock sells at a reasonable price given its quality
Despite W.P. Carey's reputation as a dividend grower and its proven business model, investors can still acquire shares of the stock at an attractive price for the long term. For instance, Realty Income (O 0.49%) is priced at just under 20 times this year's adjusted funds from operations (AFFO) per share guidance while W.P. Carey is barely trading at 15 times this year's AFFO per share forecast. Realty Income's dividend growth streak is a bit longer than W.P. Carey's and it has a monthly dividend schedule, which may be two reasons to explain the former's premium to the latter. But I would argue that the discrepancy between Realty Income and W.P. Carey is too large given W.P. Carey's greater international presence (9.9% of ABR versus 37% of ABR) and more balanced industry portfolio.
Get it now before the price goes up
When a company earns the designation as a Dividend Aristocrat, income-seeking investors suddenly have an increased interest in the stock, buying up large quantities and creating some price inflation for the stock. That's why dividend investors should snatch up shares of W.P. Carey before it becomes a Dividend Aristocrat and the stock starts trading at a higher valuation multiple.