I don't make big moves in my portfolio very often, but now that my daughter is off to college I have been working on some tax-based shifts. This is the backstory for why I bought more shares of W.P. Carey (WPC -1.70%), one of my favorite real estate investment trusts (REITs). Here's a quick look at some of the specifics.
Less need for safety
I have long considered dividends a safety valve for my family. I figured, if I were to lose my job I could simply start using the dividend income for daily expenses. I knew this decision would result in paying extra taxes, specifically for REIT dividends, which are taxed at individual tax rates. I viewed it as a form of insurance while my daughter was young.
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I'm a little sad to say that my daughter is no longer young. She's a college student and vastly exceeding her father's achievements at the same age. At this point, the safety of having easily accessible dividend income is less important. In fact, I've switched to thinking about retirement.
And that has resulted in me wanting to shield as much income from taxes as possible. So I've been moving high-yield stocks like REITs into my Roth accounts, where the dividends will avoid taxation completely. (Roth accounts are funded with after-tax money and, thus, withdrawals are not taxed.)
The problem is that I have capital gains in the REITs in my taxable accounts. But earlier this year I decided to sell most of my 3M position, where I had a material loss, and use the loss to offset taxable gains as I moved high-yield stocks to my Roth. Thus, I recently pushed most of my position in W.P. Carey over to a Roth. But, as I did that, I also added materially to my holdings in the stock.
A great story
There's a lot to like about W.P. Carey. The biggest highlight for me is probably the fact that it has increased its dividend for a quarter of a century. In fact, the dividend has been hiked annually since its initial public offering in 1998. A company can't build a record like that without doing something right along the way. It is a testament to a strong business model.
That model, meanwhile, is very attractive to me. The REIT uses the net lease approach, which means that its tenants are responsible for most property-level operating costs. That keeps risk relatively low, assuming the portfolio is large enough. W.P. Carey owns 1,440 or so properties and is one of the largest companies in the net lease space. It is plenty big.
Meanwhile, it has chosen to take a diversified approach. It has exposure to the industrial (27%), warehouse (24%), office (17%), retail (17%), and self-storage (5%) sectors, with "other" rounding the total out to 100%. On top of that, the REIT generates around 38% of its rents from outside the U.S., mostly from Europe. You would be hard-pressed to find a more diversified REIT, and diversification is very important to me.
W.P. Carey also prefers to do sale/leaseback transactions. So it is creating the leases and gets to do a deep dive into the finances of its future lessees before it signs a lease. This allows it to control the terms of its deals (including things like inflation-linked rent hikes) and gives it the confidence to work with lower credit quality tenants that will pay higher rents. There's perhaps a bit more risk in this approach, but given the dividend history, management has proven its ability to execute well over time.
So that's the big picture of why I own W.P. Carey. But as I moved it, I added more, because the yield is 6.3%. That's near the highest yield level in the past decade. While I wouldn't suggest that the REIT is screamingly cheap, it does appear attractively valued. And that's enough to get me to add a little more of this reliable dividend payer to my portfolio.
Big shifts and little ones
Moving REITs and other high-yield stocks to my Roth accounts is a fairly sizable shift that will take me years to complete. But while I'm doing that, I'm going to fiddle around the edges to make other improvements where I can. And that's exactly why I bought more W.P. Carey. I think the REIT is well run and worth owning a lot of, so long as the price is attractive. I think it is today and, as I executed my bigger Roth changes, I boosted my stake.
