W. P. Carey (WPC -1.70%) is a proven wealth creator. The diversified real estate investment trust (REIT) has delivered a 12.2% annualized total return since its public market listing a quarter century ago. That has significantly outpaced the S&P 500's 7.8% total return annualized during that time frame. Put another way: The REIT has grown a $1,000 investment into over $18,000. For comparison, $1,000 invested in an S&P 500 index fund would have only grown to about $6,700.
The diversified REIT should continue growing shareholder value in the future. Because of that, a $1,000 investment in the REIT right now could pay big dividends over the long term.
Dividends drive returns
A big driver of W. P. Carey's performance is its steadily rising dividend. The REIT has increased its payout every single year since its public market listing in 1998:
Image source: W. P. Carey Investor Relations Presentation.
That dividend growth is worth noting even for those who don't care about collecting dividend income. That's because companies that grow their dividends have historically outperformed by a wide margin:
|
Dividend Status |
Average Annual Total Return |
|---|---|
|
Dividend growers & initiators |
10.2% |
|
Dividend payers |
9.2% |
|
Equal-weight S&P 500 index |
7.7% |
|
No change in dividend policy |
6.6% |
|
Dividend cutters & eliminators |
4% |
|
Dividend non-payers |
-0.6% |
Data source: Ned Davis Research and Hartford Funds. NOTE: Returns data from 1973 to 2022.
While W. P. Carey doesn't give investors big raises each year, it consistently increases the payout. It typically provides a modest rate bump every quarter. That enables investors to collect more dividend income, a considerable portion of W. P. Carey's total return, due to its higher dividend yield (currently 5.6%). Because of that healthy base return, the company doesn't need to grow very fast to produce attractive total returns.
More dividend growth ahead
Two factors drive W. P. Carey's ability to grow its cash flow per share and dividend. The first driver is steadily rising rents across its existing real estate portfolio. As this slide showcases, most of its leases contain some form of an annual rental rate escalation clause:
Image source: W. P. Carey Investor Relations Presentation.
The majority of its leases possess clauses enabling W. P. Carey to raise rents at rates tied to inflation. With inflation running hot over the past year, the company's rents are growing faster than usual (same-store rent growth was 3.4% in the fourth quarter after increasing between 1.5% and 1.8% in 2021). The company's steadily rising rents provide a nice base for dividend growth.
The other growth driver is acquisitions. The company recently made a $468 million industrial portfolio investment in Canada. It bought four critical pharmaceutical research & development and manufacturing campuses in a sale-leaseback transaction with the country's largest generic drug maker. That company signed a 20-year triple net lease (NNN) with the REIT that features rent escalations at a fixed rate. This agreement will supply W. P. Carey with steadily rising rental income to support future dividend growth.
That deal brought the company's year-to-date acquisition total to $650 million. The REIT expects to acquire $1.75 billion to $2.25 billion of properties this year. Thanks to its strong balance sheet, W. P. Carey has ample financial capacity to make deals. Meanwhile, there are lots of opportunities to continue acquiring commercial real estate. Trillions of dollars of commercial real estate remain owner-occupied across North America and Europe, giving the company a vast acquisition pool to tap.
A smart dividend stock to buy and hold
W. P. Carey's strategy has paid dividends for investors over the years. It owns a growing portfolio of properties that supply it with steadily rising rental income. Those drivers enable the company to continue increasing its dividend payment. That makes it a smart stock to buy and hold for the long haul.
