If you are looking for reliable dividend-paying stocks, then real estate investment trusts (REITs) should be on your radar. And within the REIT sector, net lease REITs are particularly interesting because of the way they structure their leases. Realty Income (O 1.84%) and Agree Realty (ADC 0.83%) are two that you might want to consider.
But which of these two REITs is the better buy at the moment?
What's a net lease
REITs are, generally speaking, fairly simple to understand. They own properties and collect rents from the tenants that occupy them. Net lease REITs take an even more simplified approach, in that they require their tenants (usually just one per property) to pay most of the operating costs of the properties they occupy -- including things like maintenance and taxes. Simplistically speaking, a net lease REIT just has to sit back and collect rent.
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You might wonder why tenants would agree to this. The answer is that net leases often offer companies a way to raise capital (by selling a property) while still maintaining access to and use of that property. Thus, Realty Income and Agree behave somewhat like financial partners, providing capital to companies that need cash for other purposes, like growth or strengthening their balance sheets. In return, the REIT gets long-term tenants with vested interests in maintaining the properties they occupy. It's pretty close to a win-win, with investors benefiting from a reliable stream of dividends along the way.
But not all net lease REITs are the same.
Subtle and non-subtle differences
Realty Income, for example, is an industry giant with a portfolio of more than 12,200 properties and a massive $40 billion market cap. It is the industry giant. Agree Realty, on the other hand, has a portfolio of roughly 1,800 properties and a market cap of about $6 billion. It is an up-and-comer in the net lease space. To illustrate its growth, note that Agree inked $220 million worth of property acquisitions in 2015 and $1.6 billion in 2022. By comparison, Realty Income invested $9 billion in new properties in 2022.
There are pros and cons to being large, and also to being comparatively small. For example, Realty Income has fairly easy access to capital markets because it is so big. Moreover, investors have rewarded it well for its success over time, so its stock usually trades at a premium price, meaning that it can use secondary stock offerings to raise funds easily and at relatively advantageous levels. Having a low cost of capital means Realty Income can more easily make profitable deals. But it takes a lot of deals for its acquisitions to have a noticeable impact on its top and bottom lines.
Agree, being smaller, can show benefits with a smaller number of property additions. And, at least right now, its shares trade at a relatively pricey level, giving it attractive access to equity markets. As a rough gauge on this, Agree's dividend yields 4.4% today, while Realty Income's dividend yield is around 5%. By comparison, net lease REIT peer W.P. Carey yields nearly 6%.
But here's a big difference. Realty Income has increased its payouts annually for 28 consecutive years at a roughly 4.4% annualized rate. Agree Realty cut its dividend in 2011. To be fair, it was much smaller at that point, with just 87 properties, so trouble with a single tenant back then caused a great deal of uncertainty for Agree. Over the past decade, Agree Realty management has boosted the dividend at an annualized rate of roughly 6%. While it's far more resilient today, and is growing its dividend at a faster clip than Realty Income, it still can't match the segment leader when it comes to consistency.
Another important distinction is that Agree is focused exclusively on the U.S. retail sector. That's not inherently bad, but Realty Income only generates about 75% of rents from retail -- the rest comes from industrial properties and other assets. And it has a modest level of exposure to Europe -- around 10% of its rents come from properties there. Conservative investors will probably find that extra diversification appealing, and its European business materially increases the opportunity set for investments.
The winner is?
There's actually no clear winner between Agree and Realty Income, as neither looks like a bad choice for investors. However, more conservative income investors will probably prefer to stick with a reliable giant like Realty Income, which has a slightly higher yield at today's share prices as well. Agree is more of a growth-oriented option, which could make it a better fit for growth and income investors. Just go into that position knowing that you are giving up some yield in the near term in pursuit of a possibly higher dividend growth rate over time.
