I own both Realty Income (O 0.52%) and W.P. Carey (WPC 0.27%), so I see value in both of these real estate investment trusts (REITs). In fact, Realty Income is quite attractive to many income investors, given its conservative business model and reliable, growing dividend payment.
But if I were building a portfolio from scratch, I would definitely put W.P. Carey on my buy list ahead of Realty Income. The reason boils down to both the similarities between these two REITs and the differences, most importantly the way these companies have chosen to craft their respective portfolios. Here's what I mean.
1. Dividend track record
REITs are income vehicles, so one of the first things you need to check out is dividends. For me, a history of dividend increases is a key measure of corporate success. Realty Income stands tall on this measure, with 27 years of annual dividend hikes under its belt. That's a pretty impressive record, with W.P. Carey "only" coming in at around 24 years. But, that 24-year streak dates back to W.P. Carey's initial public offering, which means it has hiked in each full year of its public life. It stands toe to toe with Realty Income as far as I'm concerned.
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2. Dividend yield
Where these two REITs don't match on the dividend front is dividend yield. Realty Income's yield is 4.4% at recent prices. W.P. Carey's yield is 5%. That might seem like a small difference on an absolute level, but percentage-wise W.P. Carey is yielding nearly 14% more than Realty Income, which is a notable increase in income if you are a dividend investor.
3. Portfolio composition
Both Realty Income and W.P. Carey use the net lease approach, which means that they rent out their properties to single tenants who are responsible for most property-level operating costs. Across a large portfolio, this is a very low-risk business model, even though any individual property may be a high risk. Realty Income's portfolio is over 11,700 properties. W.P. Carey's portfolio is a much smaller 1,400 properties.
But there's more to understand here. Realty Income's portfolio is heavily concentrated in retail assets, which tend to be smaller properties (roughly 80% of the portfolio). W.P. Carey's portfolio is spread across industrial (26% of rents), warehouse (24%), office (18%), retail (16%), and self storage assets (5%, with "other" making up the remainder). Industrial, warehouse, and office assets are generally larger properties, so it makes sense that W.P. Carey's portfolio count is lower. But the bigger takeaway is that Realty Income just doesn't have the same industry diversification that W.P. Carey offers.
Just to note, both REITs have exposure to the U.S. market and Europe and, thus, offer some geographic diversification.
4. Slow and steady vs opportunistic
That said, Realty Income's portfolio makes complete sense because it is focused on being a conservative, slow and steady grower. Retail properties are fairly interchangeable and easy to buy and sell. It's not a bad REIT by any stretch of the imagination, but it is a rather boring one.
W.P. Carey, on the other hand, tends to be opportunistic as it invests. Owning a broadly diversified portfolio allows it to put money to work where it sees the most value. While that increases risk to some degree, it also means there's more potential rewards over the long term. For example, over the past decade Realty Income's dividend has grown at a 5.2% annualized rate versus nearly 5.7% for W.P. Carey. That's a modest difference, but don't forget that W.P. Carey also offers a larger dividend yield. In essence, you are getting more for the added risk.
Similar but different
I wouldn't try to dissuade anyone from buying Realty Income -- after all, I own it. But if you had to pick between Realty Income and W.P. Carey, I would lean toward W.P. Carey. It has a similarly strong dividend record, higher yield, similar business model, and a more diversified portfolio. Over the long term, I believe that will pay off handsomely for income investors who are willing to handle what I believe is just a slight increase in risk.
