In bull markets, income stocks may seem boring to many. But when the market is especially volatile, investors tend to flock to these stocks for their stability.
This explains why shares of the real estate investment trust (REIT) W.P. Carey (WPC 1.83%) are flat year-to-date while the S&P 500 index has tumbled 17% during that time. Let’s take a look at how much average monthly income the REIT could generate for income investors with $10,000 available to invest, and what makes it a good income stock.
Big, steadily growing dividends
At the current $81 share price, $10,000 could purchase 123 shares of W.P. Carey. This would create $130 in quarterly dividend income, or approximately $43 in monthly dividend income, which is equivalent to a massive 5.2% dividend yield.
And W.P. Carey is poised to become a Dividend Aristocrat in 2023. In 2022, its dividend payout ratio is set to be 80.8%, so it appears a dividend increase to get there is possible. What's more, a lower payout ratio allows the company to retain enough capital to keep building its portfolio and growing adjusted funds from operations (AFFO) over time.
A reliable business model that has enriched shareholders
Besides W.P. Carey’s manageable dividend payout ratio, the company has a dependable business model.
W.P. Carey purchases commercial real estate properties from its tenants and re-leases them back to those same tenants on triple net lease contracts. This means that tenants are obligated to pay monthly base rent checks to W.P. Carey and cover all of the expenses associated with their leased properties.
This is a convenient way for businesses to extract the equity from their real estate to repay debt or expand their operations. W.P. Carey also benefits from a weighted average lease term of 10.8 years for the capital it provides to its tenants.
Better yet, 95% of these leases are either tied to inflation or come with fixed lease escalators each year. This helps W.P. Carey to grow AFFO per share right off the bat, and makes it an inflation-resistent REIT.
And with a portfolio of 1,336 properties, the REIT is also very diversified. For instance, its top-10 tenants contributed to just 20.2% of W.P. Carey’s annualized base rent (ABR). What’s more, the company’s top-five tenant industries were only 49% of its ABR. This makes W.P. Carey’s portfolio balanced enough to withstand industry-specific downturns.
Thanks to these characteristics, investors who purchased $10,000 of W.P. Carey at the time of its initial public offering in 1998 would be sitting on around $188,000 with dividends reinvested.
For investors who may have missed the boat on W.P. Carey, the addressable market of the commercial real estate market in the U.S. and Europe is estimated to be around $12 trillion. This gives W.P. Carey the growth runway necessary to continue delivering strong returns in the future.
The valuation is reasonable
W.P. Carey trades at a forward price-to-AFFO-per-share ratio of 15.5. Given that the more established, REIT heavyweight Realty Income is trading at a forward price-to-AFFO-per-share ratio of 17.2, W.P. Carey looks sensibly valued.
And if that wasn’t enough to convince investors, W.P. Carey’s 5.2% trailing-twelve-month dividend yield is only slightly lower than its 10-year median of 5.6%.