Quality income stocks tend to provide dependable cash flow for their shareholders, regardless of what's happening in the world. But there's another reason to consider established income stocks for your portfolio: They also are more protected from significant downside than the broader market.
For instance, the diversified real estate investment trust (REIT) W.P. Carey (WPC 0.02%) has fallen 1% year to date compared to the 6% decline in the S&P 500 during that time. But should income investors buy W.P. Carey, or should they wait for a pullback in the stock? Let's delve into the REIT's fundamentals and valuation to get an answer.
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The REIT has fully recovered from COVID
The pandemic hit virtually every sector of the economy hard in 2020, and REITs like W.P. Carey were no exception. Some tenants were forced to close for a period of time in the early months of the pandemic in order to curb the spread of the virus.
However, W.P. Carey held up considerably better than many of its peers. The company's rent collection rate in the second quarter of 2020 was 96%. This was much better than even the 73% rent collection rate in the second quarter of 2020 for the Warren Buffett-backed STORE Capital (STOR).
W.P. Carey's diversification is what helped it hold up better than most other REITs in 2020. Unlike STORE Capital, whose property types are almost entirely service and retail oriented, W.P. Carey wasn't too reliant on any one property type. In 2020, the company derived 25% of its annualized base rent from industrial properties, 22% from warehouse properties, 22% from office properties, 18% from retail properties, 5% from self-storage properties, and the remaining 8% from other properties.
This explains why W.P. Carey's adjusted funds from operations (AFFO) per share only dropped 5.2% year over year to $4.74 in 2020. On the other hand, STORE Capital's decline in AFFO per share was a bit steeper at 8% to $1.83 in 2020.
Thanks to reopenings and the economic recovery that transpired in 2021, W.P. Carey reported $5.03 in AFFO per share during 2021. This represented 6.1% growth over the year-ago period and 0.6% growth over the pre-pandemic year of 2019.
And with economists projecting that global GDP will grow 4.4% in 2022, W.P. Carey's guidance for this year is strong for a stock that's set to become a Dividend Aristocrat in 2023. The midpoint of its guidance for AFFO per share this year, $5.24, would equate to 4.2% growth over 2021.
A market-crushing dividend that isn't a yield trap
One common expression that also often applies to income investing is: If it looks too good to be true, it probably is. This is referred to as a dividend yield trap. But W.P. Carey's massive 5.3% dividend yield seems like the exception to the rule.
That's because the stock's dividend payout ratio in 2021 was 83.4%. This reasonable ratio serves two purposes. For one, it leaves W.P. Carey a buffer to continue paying its dividend during a year such as 2020. And the company has adequate capital to focus on acquiring more properties to drive its AFFO per share higher and support a steadily growing dividend.
The valuation provides a reasonable entry point
In recent years, W.P. Carey has backed up the argument that it is a reliable REIT for income investors. And the valuation appears to be another reason to like the stock.
Based on the midpoint of its guidance for this year and the $80 share price, W.P. Carey's multiple of price to AFFO per share is 15.3. This is well below the average forward price-to-earnings (P/E) ratio of 19.4 for the S&P 500. And since price to AFFO per share is the closest thing REIT's have to a forward P/E ratio, W.P. Carey looks to be an attractively priced income stock at this time.
