For generations, the Dow Jones Industrial Average has been closely followed as a barometer for not just the stock market itself, but the whole U.S. economy. That's because the Dow is made up of 30 of the largest and most influential U.S. companies, blue chips renowned for their stability and reliability.
That makes it a good benchmark for other businesses with the same qualities -- including real estate investment trusts (REITs), collections of income-producing properties that are bound by tax law to pay out at least 90% of their taxable income as dividends. REITs can offer income-seeking investors stability through their working years -- and cash flows when retirement comes.
Agree Realty (ADC -0.48%) stands out as one such option for long-term investors. Agree caters to strong and steady retail businesses, with a portfolio that just topped 2,000 individual properties. And since it went public in 1994, its stock has averaged an annual return of 12%. I think there's plenty more in store.
Beating the Dow while beating back the retail apocalypse
Agree's portfolio is dominated by well-capitalized tenants in essential industries. Many of them stayed open during the early days of the COVID-19 pandemic, helping Agree flourish when other retail REITs had to cut or suspend their dividends amid weeks and weeks of shutdowns.
Investment-grade tenants account for 68% of Agree's annualized base rent, led by Walmart at 6.5%, Dollar General at 4.9%, and Tractor Supply Co. at 4.4%. Grocery stores account for 10.1% of the rent roll, followed by home improvement at 8.9%, and tire and auto service at 8.7%. These are all net-lease tenants, meaning they're responsible for items like taxes, upkeep, and insurance.
Agree is also growing its ground lease business, which can be even better. The tenant develops the property itself, and if it defaults on the ground lease, Agree gets the building. That arrangement now accounts for about 12% of its portfolio.
Agree also has an outstanding balance sheet, with a net-debt-to-EBITDA ratio of 4.1 and $1.3 billion of liquidity to continue selectively buying and developing properties. In fact, $1.3 billion is also the acquisition guidance for full-year 2023, and the trust bought 92 new properties for $305 million in the second quarter alone. Agree likes to tout the dependability of its tenants, and it said 73% of the tenants in those new properties were investment-grade. That means they can pay the rent through thick and thin.
Agree blasts past the blue chip benchmark
Agree's business strength has translated to big gains for investors over the years. For a benchmark, let's use State Street's SPDR Dow Jones Industrial Average ETF Trust (DIA 0.36%), a $29 billion exchange-traded fund (ETF) that tracks the 30 stocks that make up the Dow Jones at any given time.
The chart below shows how sharply Agree has outpaced that ETF in growing total return. It's turned a $1,000 investment in 1998 -- when the Dow Jones ETF debuted -- into nearly $15,000, assuming you reinvested the dividends. That's about double that of the blue chip-laden benchmark.
ADC Total Return Level data by YCharts
Total return, of course, combines dividends and share price, and here Agree has again proven quite adept at providing a nice flow of passive income to its shareholders.
The company has averaged an annualized dividend growth of 5.9% a year for the past decade. When it boosted its payout by about 1% in April, that was the fifth such bump since Agree changed its cadence from quarterly to monthly dividends in January 2021.
Here's a chart that reflects that performance in yield, again showing Agree's status as a cash-gushing Dow-beater.
ADC Dividend Yield data by YCharts
There's more to come
Agree is headed up by its founder's son and other experienced insiders, and their commitment to the company may well help keep this leading retail landlord ahead of the Dow for years to come.
In fact, now might be a particularly nice time to buy. Shares are selling for about $55.50 at recent prices, bouncing around their 52-week low, and Wall Street analysts agree on a consensus target price of $73.45. Along with that potential upside, you'll enjoy a nice yield of more than 5%, compared to a relatively paltry 2% or so for the Dow index funds.
