Agree Realty's (ADC 1.16%) stock has been on a roller-coaster ride over the past year, but in the end the price is basically the same as it was 12 months ago. That said, the most recent dividend payment was nearly 6% higher than it was a year earlier, leaving the yield at around 4%. Compared to the S&P 500's average yield of 1.75% and the average real estate investment trust (REIT) of 3.5% (using Vanguard Real Estate Index ETF as a proxy), that's pretty attractive. But it's the dividend-growth opportunity that's probably the most exciting factor here.
Going up, faster
Realty Income (O 0.11%) is the bellwether name in the net-lease sector. Net lease means that a real estate investment trust owns a property, but its tenant, usually a single company, is responsible for most of the property-level operating costs (like taxes, insurance, and maintenance). Across a large portfolio, it's actually a pretty low-risk investment approach despite the fact that each property only has one tenant. Realty Income owns over 10,700 properties and has an investment grade-rated balance sheet. The company's dividend yield is 4.7%.
Image source: Getty Images.
Agree's dividend yield, at 4%, is notably lower, but it too has an investment grade-rated balance sheet. And while Agree's portfolio is much smaller at around 1,700 properties, that's big enough for diversification purposes and actually affords one important benefit (more on this below). The really important difference here is that Agree's fourth-quarter dividend was nearly 6% higher than it was a year ago (the dividend is paid monthly). Realty Income's dividend ended 2022 with a run rate that was up by less than 1% year over year.
ADC Dividend data by YCharts
For dividend-growth investors, Agree certainly looks far more attractive than Realty Income right now.
More dividend growth ahead
Although it's possible that Realty Income's dividend growth picks up from the current low levels, it is also quite likely that Agree continues to grow its disbursement at a more rapid pace. From a big-picture perspective, its portfolio is filled with high-quality tenants. Nearly 70% are investment grade and almost all are national brands, major regional brands, or franchisees of national brands. That provides a strong income stream to support the current dividend rate.
Meanwhile, Agree is an active acquirer of new properties. It expects to add around $1.7 billion worth of properties in 2022, up from around $1.4 billion in 2020 and $1.3 in 2021. On top of that, it also has a small development pipeline. Realty Income buys properties, too, but with 10,700 assets in its portfolio, it has to spend a lot more money to move the needle. Agree's smaller portfolio means less spending can have a much larger impact on its growth and future dividend-paying ability.
Meanwhile, Agree's adjusted funds from operations (FFO) payout ratio is a fairly modest 75%. (For reference, Realty Income's adjusted FFO payout ratio is in the same ballpark at 77%.) That leaves room for more growth even if the REIT faces some adversity over the near term. That's actually likely, given that rising interest rates increased the cost of deal-making. But with a smaller portfolio than a giant like Realty Income, Agree doesn't have to make nearly as many deals to keep expanding its top and bottom lines.
Also, Agree issued $300 million of debt at a sub-4% rate in 2022 and has sizable forward-equity sales agreements that could provide over $350 million in cash to its coffers. In other words, the REIT still has some financial firepower at its disposal to get deals done even in the face of rising rates. Maybe 2023 will be a slow year, including on the dividend-growth front, but the long-term trend here is still looking up -- and likely at a faster rate than industry giant Realty Income.
Nothing's perfect
Is Agree Realty the perfect dividend stock? Probably not, but no company would likely fit that lofty description. One big negative is its heavy focus on retail assets, which is a concentration risk. But if you are looking at the net-lease space, which likely means you've done a deep dive on Realty Income, you may want to branch out and consider a smaller peer like Agree and its faster-growing dividend. Sure, you'll have to give up some yield, but in the long run that may be worth it if the goal is dividend growth and not maximizing the current income your portfolio generates.
