Negative market sentiment around W.P. Carey (WPC -1.08%) is high today. The stock has seen a material price decline, and the yield has been pushed up to 6.4%. That's an attractive level relative to other large net-lease real estate investment trusts (REITs). Here's why W.P. Carey can keep paying investors well despite some very real headwinds.
W.P. Carey has a good dividend record
To start the discussion of W.P. Carey's dividend, it is important to note that the REIT has increased the payment each year since its 1998 initial public offering (IPO). Think about that time span, which included the 2000 tech crash, the Great Recession, and the global coronavirus pandemic. The dividend was increased through each of these massive market and economic dislocations. Clearly, the board of directors places a great deal of importance on reliably returning cash to shareholders.
The REIT is also investment-grade rated, earning a BBB+ from S&P Global. Notably, that rating was recently increased. That means that the company's already solid financial foundation is getting more sound. A strong balance sheet provides an important underpinning for dividend payments.
Meanwhile, in the second quarter, adjusted funds from operations (FFO) totaled $1.36 per share. The dividend payment in the quarter was $1.07 per share, rounding up to the nearest cent. That equates to an adjusted FFO payout ratio of just under 80%. That's a reasonable level for a net-lease REIT, especially given that the company's cost structure is very lean -- its tenants are responsible for most property-level operating costs. And at 80%, the payout ratio leaves ample room for adversity before the dividend would be at risk.
Why are investors so downbeat on W.P. Carey?
So the dividend looks well supported. But why is W.P. Carey's dividend so much higher than those of other large net-lease REITs, like Realty Income, National Retail Properties, and Agree Realty? Those REITs have yields of 5.1%, 5.5%, and 4.5%, respectively.
One big issue is that W.P. Carey's highly diversified portfolio includes offices. This sector is out of favor today thanks to lingering work-from-home trends, and it makes up around 16% of the REIT's rent roll. Another problem is that W.P. Carey's largest tenant, U-Haul (2.6% of rents), is planning to buy back a portfolio of self storage assets from the REIT. These are legitimate concerns.
The question for income investors, however, should be whether or not the concerns put the dividend at material risk. And the answer to that is "most likely no." W.P. Carey has long had offices in its portfolio, is working to reduce its exposure to the property sector, and is very selective about what it buys. It is highly unlikely that all of its office tenants stop paying rent all at once. With regard to U-Haul, W.P. Carey will get the cash from the sale, which is good, but it will take time to reinvest the proceeds into new assets. So there could be a near-term hit to FFO, but it is unlikely to be a long-term headwind.
This high-yield REIT looks attractive
W.P. Carey's dividend yield is near the highest levels of the past decade. While the yield has been higher in the past, notably during the worst of the coronavirus-driven bear market in 2020, long-term income investors trying to find a reliable high-yield dividend stock should take the time to get to know this REIT. It has company-specific issues to deal with, but they are unlikely to upend W.P. Carey's long streak of dividend increases. In fact, Wall Street's concern about the short-term problems W.P. Carey is facing may actually be an opportunity for those investors that think in decades and not in days.