Real estate investment trusts (REITs) like W.P. Carey (WPC -2.23%) mainly attract dividend investors -- in this case, with the stock's generous 5% dividend yield. That's well above the S&P 500's 1.4% average yield and the 2.9% yield of the average REIT, using the Vanguard Real Estate Index ETF (VNQ -0.17%) as a proxy.
But growth-minded investors shouldn't ignore high-yield REITs, which becomes very clear when you look at W.P. Carey's total return versus the broader market and the REIT sector.
Here's a closer look at how much you'd have now if you invested in high-yield W.P. Carey a decade ago and why dividends are so important.
It all depends on how you look at it
When most investors look at a stock chart, they focus on share price appreciation. On this front, the S&P 500 is up 176% over the past decade (as of Sept. 7, 2012). W.P. Carey falls woefully behind, with a stock price increase of 91.7%. That's way better than the average REIT, which is up just 39.8% over the same span, but clearly short of the S&P 500.
Putting that into dollar figures, the S&P 500's stock price would have turned a $10,000 investment into $27,650. W.P. Carey would have ended up at $19,180. And the average REIT would have grown to $13,970.
It isn't shocking that W.P. Carey lagged behind the index on stock price return, given that a huge portion of what investors get here is dividend income. Note that its yield today is roughly 3.5 times that of the yield investors collect from the S&P 500.
What happens to the performance numbers if you reinvested those dividends? W.P. Carey's fat dividend changes everything in the total-return figure. In fact, the REIT's total return tops that of the S&P 500! Over the past decade, the company's total return, which includes reinvested dividends, was 242.2%, versus 234.6% for the S&P 500, and a somewhat disappointing 106.9% for the average REIT. In dollar terms, a $10,000 investment in W.P. Carey would have grown to $34,240. The same amount in the S&P 500 would have reached $33,450, with the average REIT coming in at $20,690.
The difference between stock price return and total return highlights the incredible importance of dividends. W.P. Carey is also a well-run REIT, which is equally important.
A solid core
Past performance, as the legal warnings go, is not a guarantee of future results. Still, W.P. Carey offers some pretty impressive fundamentals to back up its past performance. For example, it has increased its dividend annually since its 1998 initial public offering (IPO). It is on the cusp of becoming a Dividend Aristocrat, an elite group of stocks that have raised their dividend each year for at least 25 straight years.
It also has one of the most diversified property portfolios in the REIT sector, with assets spanning the industrial (26% of rents), warehouse (24%), office (20%), retail (16%), and self-storage (5%) sectors. A fairly large "other" grouping rounds it out to 100%.
On top of that, roughly 64% of rents are domestic, with the rest coming from foreign countries, mostly in Europe. This plays into the company's opportunistic investment approach, allowing it to put money to work in the sectors and regions where management sees the most value.
The REIT has a history of working directly with companies via sale/leaseback transactions. This allows it to set lease terms and gives it an inside look at a lessee's financials. It will often work with companies with lower credit quality if it thinks the lessees are strong enough to reliably cover rents, benefiting if such companies get credit upgrades down the line. Meanwhile, to protect itself and shareholders in such situations, W.P. Carey focuses on mission-critical assets from which a company can't easily walk away.
And there's the net-lease approach, which means that W.P. Carey's lessees are responsible for most of the operating costs of the assets they occupy. Although net-lease properties are generally single-tenant, which increases the risk of an individual asset, the company's net-lease properties are fairly low risk when spread across the more than 1,300 properties it owns. The current inflationary environment highlights this, since the REIT's tenants -- and not the company itself -- are the ones that will be hit with most of the big operating-cost increases.
Time to dig in
If you are looking to add some real estate exposure to your portfolio, regardless of whether or not you are an income investor or focused on growth, W.P. Carey is clearly worth a closer look. While dividends might not be top of mind for investors looking for capital appreciation, when you couple this REIT's solid business model with reinvested dividends, the outcome has historically provided market-beating results. And it shows why investors shouldn't focus exclusively on stock price charts, since they don't always tell the full story.