Dividend stocks often make fantastic investments. The best ones steadily increase their dividends. That income and growth combo often enables them to produce market-beating total returns.
W. P. Carey (WPC -1.70%), Agree Realty (ADC -0.48%), and Realty Income (O -0.17%) have excellent dividend growth track records. That makes them stand out to a few Fool.com contributors as ideal dividend stocks to buy. Here's why they believe those with around $1,000 to invest right now shouldn't hesitate to use that money to grab some shares of these income-producing machines.
A dividend-paying machine
Matt DiLallo (W. P. Carey): W. P. Carey is an unsung hero among dividend stocks. The diversified real estate investment trust (REIT) has increased its payout every year since its public market listing in 1998 (and every quarter since 2001). That has it approaching the quarter-century milestone of annual dividend growth.
The company currently pays a very attractive dividend that yields 6.3%. That's several times above the S&P 500's dividend yield of 1.5%. W. P. Carey would turn a $1,000 investment into $63 of annual dividend income at that rate (or around $21 if you're only allocating a third of that money to this REIT). That compares to only $15 for a similar S&P 500 index fund investment.
W. P. Carey's dividend is on a very firm financial foundation. The REIT owns a diversified portfolio of operationally critical real estate triple-net leased (NNN) to high-quality tenants. Those leases supply it with incredibly stable rental income.
That income rises each year. Nearly all of W. P. Carey's leases contain some form of annual lease escalation, with most tied to inflation. While inflation has moderated recently, it's accelerating rent growth for W. P. Carey. Rent growth should remain elevated in the future, driven by the continued flow-through of inflation on rents and higher fixed rental increases from leases signed in recent quarters.
W. P. Carey also has an excellent history of making accretive acquisitions. The company has invested nearly $1 billion this year to expand its portfolio. W. P. Carey's CEO noted in its second-quarter earnings release that the company "expect[s] further deal momentum over the second half of the year, given the competitiveness of sale-leasebacks as an alternative source of financing and the investment spreads we're achieving."
That drives the REIT's view that it will make $1.8 billion-$2.3 billion of new investments this year, which would be record volume. The company has ample financial flexibility to fund that level of deal volume, giving it a competitive advantage in the current market. New properties provide incremental income that should grow as lease rates escalate.
W. P. Carey is an income-producing gem. The REIT's rounding the corner on a quarter century of dividend growth, a streak that seems likely to continue.
This REIT is priced right for a hot summer deal
Marc Rapport (Agree Realty): Agree Realty has long been a popular choice for investors interested in passive income with a nice side of share price growth. Plunking a third of that $1,000 you have to invest now would continue to pay dividends for years to come.
This REIT focuses on acquiring and developing properties leased primarily to major retail chains such as Walmart, Home Depot, and Kroger. The suburban Detroit firm has used its consistent cash flow, rock-solid balance sheet, and conservative but opportunistic strategies to grow its portfolio to 1,900 locations nationwide. It's also grown an impressive record of shareholder value.
This chart shows how Agree has performed over the past decade in total return compared with a key benchmark exchange-traded fund, the Vanguard S&P 500 ETF. Additionally, Agree has yielded more than the big index fund over that time, including the current levels of about 4.4% and 1.5%, respectively.
ADC Total Return Level data by YCharts.
Since moving to monthly payouts in January 2021, Agree has raised its dividend five times and now pays $0.243 a share. A payout ratio of about 81%, based on cash flow and steadily rising income and funds from operations (FFO), points to this retail REIT's continued ability to keep boosting the payout.
The share price is down sharply from last year at this time, about 18%, and at a current price of about $65, you could buy at least five shares with your $333, giving you a stake in a well-respected dividend machine.
Realty Income investors shouldn't fear a recession
Brent Nyitray (Realty Income): Realty Income is a REIT focused on single-tenant properties under an unusual lease structure. Most people are familiar with the gross lease model, which requires the tenant to pay monthly rent while the landlord pays most of the operating expenses.
Alternatively, Realty Income uses an NNN model, which requires the tenant to cover most operating expenses, including rent, insurance, taxes, and maintenance. These leases are generally long term (10 years or more) and have automatic escalators. They are also extremely expensive to break.
To make the NNN model work, the tenant's business model must be sustainable throughout the entire economic cycle and not be subject to the whims of fashion. The ideal tenant for an NNN would be a convenience store, dollar store, gas station, grocery store, or drugstore. Realty Income's top tenants include Dollar General, Walgreens, and 7-Eleven.
While most REITs were forced to cut their dividends during the COVID-19 pandemic, Realty Income raised its monthly dividend three times in 2020. Realty Income's tenants were considered essential businesses and permitted to remain open during the pandemic lockdown. This also is a function of the natural defensiveness of Realty Income's tenants.
Realty Income has guided for adjusted FFO (AFFO) per share to come in between $3.94 and $4.03. At current levels, Realty Income is trading at a price-to-AFFO ratio of 15.3 times. This is a reasonable multiple for a high-quality REIT. The company's dividend yield is 5%, and the $3.07 annual dividend is well covered by the guided AFFO per share. Realty Income is a classic defensive stock and should be a core holding of an income investor's portfolio.
