Dividends can't be faked, and they can't be retroactively changed, making them a very tangible return on your investment. It's why so many investors focus on dividend income, since dividend-paying stocks basically pay you for owning them.
Two real estate investment trusts (REITs) that have long paid for themselves are Realty Income (O +0.77%) and W.P. Carey (WPC +0.53%). Here's why you might want to own one or both.
Net lease simplicity
Both Realty Income and W.P. Carey are known as net lease REITs. Essentially, they own single-tenant properties for which the tenant is responsible for most of the operating costs of the asset. It is a pretty simple way of owning a property and, spread over a large-enough portfolio, it is relatively low risk. Realty Income is the industry giant, with over 11,000 properties. W.P. Carey has a portfolio of around 1,300 assets.
Adding to the allure here is that net lease assets generally come with very long leases. Both Realty Income and W.P. Carey have an average remaining lease term of over 10 years. That's long enough to outlast the length of the typical recession. And both REITs have at least some built-in rent increases in their portfolios, which helps them deal with inflation.
1. Realty Income: Slow, steady dividend growth
Realty Income is the name that more conservative investors will find most interesting. It has a dividend yield of around 4.3%, paid monthly. And the dividend has been increased for an impressive 27 consecutive years, making it a Dividend Aristocrat. Roughly 80% of the portfolio is in necessity-based retail properties, but these tend to be generic spaces that are easy to sell or re-lease if there is a tenant issue. The REIT also has an investment-grade-rated balance sheet, meaning it has relatively cheap access to debt capital.
The one drawback here is that investors have historically afforded Realty Income a premium price, so the yield is on the low side of its peer group. That said, this means it has relatively cheap access to equity capital too, giving it a leg up on the competition when it comes to buying assets.
NYSE: O
Key Data Points
With a size and scale few can match, Realty Income is probably worth a premium for conservative income investors.
2. W.P. Carey: Spreading its bets
W.P. Carey takes on a bit more risk because its portfolio contains a number of large, essentially irreplaceable assets. Retail properties make up just 18% of its rents, while industrial is 26%, warehouse 24%, office 19%, and self-storage 5%. The rest is in a broad "other" basket.
Industrial, warehouse, and office properties tend to be larger and aren't as easy to deal with if there is a tenant problem. So there is a bit more risk here, helping to explain the REIT's more generous 5% yield. However, W.P. Carey has a long history in the net lease space and tends to work closely with its tenants, so it has a good handle on the vital nature of the assets it buys and the ability of its tenants to pay rent.
NYSE: WPC
Key Data Points
That brings up the dividend, which is the best indication of the REIT's long-term success. W.P. Carey has increased its dividend every year since its initial public offering (IPO) in 1998. That's not quite as long as the streak that Realty Income has put up, but it is every bit as impressive.
One of the key stories here is that W.P. Carey is very opportunistic when it comes to investing, with its diversification allowing management to put money to work wherever it sees the most value. On that score, roughly 37% of rents come from outside the United States (mostly Europe), so the diversification here is way bigger than just the property type.
Diversification is good for your portfolio, and it's good for a REIT's portfolio. You will be hard-pressed to find a REIT with a more diversified model than W.P. Carey.
Slow and steady wins the race
Although neither Realty Income nor W.P. Carey will pay for themselves overnight, given enough time these rock-solid REITs should provide you with a steady stream of passive income. Add in regular dividend increases, and you'll likely be glad you own them if you have an income bias to your investment approach.
