Real estate investment trusts (REITs) are wonderful income plays, but you want to invest in the best names. It's just safer to reduce your risk when you put money to work in an industry that makes generous use of leverage to buy hard-to-sell assets. But if history is any guide, Realty Income (O -0.59%) and National Retail Properties (NNN 0.57%) are the kinds of names you can buy and happily own for years to come.
1. Realty Income: The bellwether
Realty Income has trademarked the nickname "The Monthly Dividend Company." That speaks to the fact that it pays a monthly dividend, as well as the 97 consecutive quarterly dividend increases it has now amassed. It's a Dividend Aristocrat that has proven its reliability to dividend investors, so it can afford to make some bold claims.
That said, it also happens to be the largest net lease REIT you can buy, with a portfolio of more than 10,000 properties. A net lease requires the tenant to pay for most of the operating costs of a property, leaving the landlord to, simplifying things greatly, just collect the rent.
These are generally single-tenant properties, so any individual asset is risky, but when you own a giant portfolio, the risk is pretty low. About 80% of Realty Income's portfolio is retail, with the rest largely in the industrial space. Retail properties are generally easier to deal with because they tend to be generic in nature, so tenants can be replaced or the asset can be sold without much trouble.
The difficult part to get your head around here is that Realty Income's yield is a historically low 4.3%. That's actually a benefit for the business, because REITs sell equity to buy new properties. So the premium valuation makes it easier to grow the business and keep that dividend streak going. Sometimes it's worth paying up a little to buy the best.
2. National Retail Properties: Even better?
It's hard to top Realty Income when you look at the big picture, but National Retail Properties does beat it out in one area -- dividends.
For starters, this net lease REIT's yield is more generous, at around 5%. But what's really impressive is that this Dividend Aristocrat's annual dividend streak is 33 years long, roughly five years longer than the one at Realty Income.
There are some other important differences from there, too. National Retail is 100% focused on retail assets, so it doesn't offer the same level of diversification as Realty Income. It also has a smaller portfolio, with around 3,200 properties. That's plenty of scale to offset any single tenant or property concerns, but it is relatively smaller than Realty Income.
That is actually part of the plan here, because National Retail takes more of a sharpshooter approach, focusing on creating relationships with tenants. It then seeks to grow along with its best customers. To put a number on that, between 2007 and 2021, just over 70% of its acquisitions came from existing relationships.
That's an interesting differentiator that conservative investors will likely appreciate. And it suggests that the slow, steady dividend growth National Retail has achieved over time has a solid foundation beneath it.
Put that cash to work
Although $500 doesn't seem like a lot of cash to start with, every penny counts. And if you buy the right dividend-paying stocks, letting the dividends get reinvested over time, you can turn that $500 into a much bigger number.
Indeed, even though you'll only wind up with a handful of shares of Realty Income or National Retail Properties, focus more on the dividend consistency each of these net lease names offer -- because that's where the real value is here.