When investors are looking to create streams of passive income, the first thing they often check is a stock's dividend yield. In many ways, that makes sense: Higher dividend yields can equate to large payouts for investors. But there is so much more to consider when evaluating a company. Let's take a closer look at high-yielding real estate investment trusts (REITs) W.P. Carey (WPC 5.16%) and Global Net Lease (GNL 0.81%) to understand why there's more to an investment prospect than its dividend yield.
Similar but different businesses
Both W.P. Carey and Global Net Lease are net-lease REITs. This means that they buy single-tenant properties, often directly in sale/leaseback transactions, for which the tenant is responsible for most of the operating costs of the assets. Although any single property is fairly high-risk, given that there's only one tenant, when spread out across a large enough portfolio, net lease is a pretty low-risk approach. W.P. Carey owns around 1,300 properties, whereas Global Net Lease owns just over 300 assets.
Both REITs benefit from diversified portfolios. From a geographic perspective, around 37% of W.P. Carey's rents come from outside the United States, mostly from Europe. Roughly 40% of Global Net Lease's mix is from outside the United States, again mostly Europe.
From a property type perspective, Global Net Lease generates around 55% of its rents from industrial and warehouse properties, 42% from office, and the remainder from retail. W.P. Carey's breakdown is 50% warehouse/industrial, 19% office, 18% retail, and 5% self storage, and the remainder in a fairly large "other" category.
From this top-level perspective, the REITs are very similar, even though W.P. Carey is clearly larger. But that doesn't mean that the two are interchangeable -- W.P. Carey's dividend yield is roughly 5% today, and Global Net Lease's is a huge 11%.
Why W.P. Carey is better
Global Net Lease's yield, which is over twice what you'd get from W.P. Carey, is a warning sign rather than a green light. The important detail here is rooted in history: Global Net Lease cut its dividend during the 2020 pandemic by a painful 25%. W.P. Carey, meanwhile, increased its dividend each quarter through that difficult year -- and has again each quarter since. To be fair, these increases have been modest, but they signal a strength that Global Net Lease has clearly lacked given that its dividend has been static since the cut. In fact, W.P. Carey has increased its dividend annually since its 1998 initial public offering (IPO), so this REIT's dividend trend is a long-standing one.
But history isn't the only factor to worry about when it comes to Global Net Lease. In the first quarter, Global Net Lease's adjusted funds from operations (AFFO) payout ratio was 93%, falling slightly year-over-year. W.P. Carey's AFFO payout ratio was a far stronger 78%, with AFFO increasing year-over-year. Clearly investors are aware that W.P. Carey's dividend is on more solid ground.
Even though the two REITs take very similar approaches, solid investment research requires you a deep look at each company's business model. When it comes to net-lease REITs, scale is important: It allows a REIT to take on deals smaller competitors could not, provides greater access to deal flow in general, and usually allows for easier access to capital (the yield difference alone puts Global Net Lease at a major disadvantage on this front). With a larger portfolio and a market cap of $15.5 billion, W.P. Carey is in a better strategic position than $1.5 billion-market-cap Global Net Lease.
It's also important to note that W.P. Carey is internally managed while Global Net Lease is externally managed, which some investors fear opens up the chance for a conflict of interest. In fact, Global Net Lease actually warns investors that the management contract it has in place may incentivize more aggressive investment choices. The dividend cut in 2020 and high payout ratio suggest that the REIT is, indeed, operated more aggressively.
Err on the side of caution
Although similar in many ways, W.P. Carey looks like the better long-term investment choice for most investors, even with its lower dividend. That's particularly true if you are looking for a reliable stream of passive income. Sure, you could juice your dividend income with Global Net Lease, but the risk of a further dividend cut could leave you short on cash just when you most need it.