What if there was a way that you could make your money work for you by providing consistent and slowly growing income? Fortunately, there is an investment strategy that can deliver exactly that to you.
The strategy is called dividend growth investing. And there are many businesses with reputations of decades of dividend growth that could fit within this investing approach. With 26 consecutive years of dividend growth under its belt, W.P. Carey (WPC -1.70%) is one such real estate investment trust (REIT) that investors may want to ponder buying for their portfolios. Here's why the REIT could pay rising dividends to shareholders for many more years.
A well-established and highly diversified REIT
W.P. Carey is a net lease REIT whose strong suit is purchasing single-tenant properties from clients and leasing them back to said clients, otherwise known as a sale-leaseback transaction. The benefit to the REIT is that these leases run for a long time -- the weighted average of its existing leases is 10.9 years -- and include annual rent increases mostly tied to inflation. This builds visibility and growth into W.P. Carey's rent revenue. Tenants are eager to sign these leases because the funds they receive from such deals can help grow their business or strengthen their financial health.
The dual appeal of these leases coupled with a 50-year corporate history explains how W.P. Carey has grown to almost 400 tenants. The REIT's portfolio consists of 1,400 properties scattered throughout Europe and the United States as of March 31.
As you'd expect from a major player within the commercial net lease real estate industry, W.P. Carey is quite diversified in numerous ways. For one, the company's top 10 tenants accounted for just 18.6% of annualized base rent (ABR) as of March 31. W.P. Carey's portfolio is also spread out quite evenly across industrial (27% of ABR), warehouse (24%), retail (17%), office (17%), self-storage (5%), and other property types (9%). This diversification is important to the company's ability to continue paying dividends because it is more durable than peers when a given subsector of commercial real estate encounters difficulties.
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The market-smashing payout is safe
W.P. Carey's 6.2% dividend yield is quadruple the S&P 500 index's 1.5% yield, which probably jumps off the page to income investors. Better yet, this dividend is arguably in little danger of being cut anytime soon.
W.P. Carey's dividend payout ratio is positioned to come in at approximately 80% in 2023, which can help it withstand a temporary downturn in adjusted funds from operations (AFFO) per share. Combining excess funds after its dividend obligation with the usual REIT methods of raising capital, such as debt and share issuances, the REIT should keep growing at a slow and steady pace through property acquisitions.
The only arguable downside to W.P. Carey is that its high starting income comes at a cost of growth. The REIT's midpoint AFFO per share is expected to grow at just 1.1% in 2023, which means that annual dividend growth may never again surpass 1% or 2%.
W.P. Carey stock is a blue chip buy
Investors seeking reliably growing income should certainly consider looking at W.P. Carey. Poor stock performance in 2023 due to rate hike and expiring debt concerns appear to have made the stock a good deal. Shares of W.P. Carey can be purchased at a forward price-to-AFFO-per-share ratio of merely 13, which is an attractive valuation for a tried-and-true income stock. Making the buy case even stronger, the stock's price-to-book (P/B) ratio of 1.6 is materially below the 10-year median P/B ratio of 2, and near its three-year low of 1.5.
