W.P. Carey (WPC -1.70%) and Spirit Realty (SRC) are two prominent net-lease real estate investment trusts (REITs). Spirit is offering investors a roughly 6.4% dividend yield today, while W.P. Carey's is closer to 6%. Is it OK for dividend investors to go with the higher yield here, or is there more that needs to be examined? Here's a quick look.
1. Dividends
Spirit Realty's dividend yield is roughly 40 basis points higher than that of W.P. Carey, or roughly 7%. That's not a huge uptick on an absolute basis, though investors looking to maximize the income they collect might want to dig into the numbers just a little.
Image source: Getty Images.
W.P. Carey has increased its dividend annually since its 1998 IPO, giving it roughly a quarter of a century of dividend increases under its belt. Spirit, a much younger company, cut its dividend in 2018, but it has been heading generally higher since that point. That said, the dividend was held flat in 2020 and 2021, which was perhaps prudent given the coronavirus pandemic, but falls short of the increases W.P. Carey made in both of those years.
As for the adjusted funds from operations (FFO) payout ratio, W.P. Carey stood at 81% in the first quarter. Spirit's adjusted FFO payout ratio was 74% or so. Spirit comes out ahead here, but W.P. Carey's payout isn't particularly worrying.
While there's no clear winner, investors who favor companies that have a proven dividend-paying history will likely prefer W.P. Carey.
2. The portfolio
An area of greater differentiation will be the way these two REITs choose to invest. W.P. Carey has a heavy focus on diversification. Its portfolio of roughly 1,440 properties is spread across the industrial (27% of rents), warehouse (24%), office (17%), retail (17%), and self storage (5%) sectors, with a large "other" category bringing the figure up to 100%. It also generates around 38% of its rents from outside the United States, mostly Europe. That's a huge amount of diversification, and few other REITs even come close to it.
Spirit's portfolio of 2,080 or so properties is largely retail, at around two-thirds of the rent roll. Industrial properties account for about a quarter of the pie, office 3%, and "other" makes up the difference. There has been a concerted shift going on, with management highlighted that it has been selling retail assets and buying industrial in recent quarters. That's worth noting, but it still isn't anywhere near as diversified as W.P. Carey.
Diversification gives W.P. Carey a great deal of leeway to invest where it sees the best opportunities. Spirit's portfolio doesn't have the same degree of optionality in it, at least not yet.
3. The foundation
Both W.P Carey and Spirit Realty have investment-grade-rated balance sheets. So from a big-picture perspective, they are both fairly strong REITs. That said, S&P upgraded W.P. Carey to BBB+ in Jan. 2023, a notch higher than the BBB that Spirit has earned. It's hard to suggest that this alone makes W.P. Carey a better investment choice, as both are clearly financially solid entities. However, the upgrade is a statement that W.P. Carey is not just strong, but improving its financial positioning over time.
4. Growth
There's some overlap here with other points, but growth still deserves a separate call out. W.P. Carey is one of the largest net-lease REITs you can buy, with a market cap of around $15 billion. Although its portfolio is smaller, the property sectors it has more of tend to have larger individual properties. It is harder to grow a larger company than it is to grow a smaller company. Spirit's market cap is around $6 billion. That's not inconsequential, but it takes less investment to move the needle on the top and bottom lines.
On the dividend front, W.P. Carey's higher payout ratio leaves less room for future dividend increases. Spirit's lower payout ratio gives it more room. On that front, Spirit's last dividend increase was around 4%. W.P. Carey (which has been increasing its dividend quarterly of late) paid a dividend that was roughly 1% higher year over year in the second quarter. There are some moving parts at W.P. Carey, including a sizable acquisition, so there's reason to believe that the current rate of increase will rise over time. But still, Spirit appears better positioned, overall, on the dividend growth front.
Which is right?
At this point, neither looks like it would be a bad option, but the nuances here will probably lead you to favor one over the other. For conservative investors, W.P. Carey's impressive history, diversification, and still-generous yield will probably be enough to tip the scales in its favor. For those willing to take on a little risk with a less proven REIT in the hope of a higher yield mixed with better growth prospects, Spirit could be a good fit.
