It would probably be a mistake to simply forget about net-lease giant Realty Income (O -0.36%). It is a well-run company, but it poses some problems for investors when you dig into the story a bit. For those looking for a bit more growth, competitors Agree Realty (ADC 0.37%) and W.P. Carey (WPC -0.88%) might be more attractive.
I happily own Realty Income
There's nothing inherently wrong with Realty Income. In fact, I own it and I'm glad I do. But it isn't the perfect real estate investment trust (REIT). Like every company, it comes with some negatives.
For example, while it is the largest net-lease REIT (net leases require tenants to pay most property-level expenses), its size means that growth is likely to be slow over time. It simply takes more to move the needle. True, being big provides better access to capital markets, but dividend investors looking for a combination of yield and dividend growth will probably end up disappointed here. Notably, the dividend has increased by just 3% or so on an annualized basis over the past five years. That's enough to keep up with the historical rate of inflation growth, but not really enough to grow the dividend's buying power over time.
Realty Income is a foundational investment for a more diversified dividend portfolio. That's why investors might want to consider alternatives or companion stocks like Agree Realty or W.P. Carey.
Agree Realty is growing
Realty Income's market cap is around $48 billion. Agree's market cap is just $6 billion or so. Realty Income owns more than 15,400 properties, while Agree owns around 2,100 properties. Clearly, Agree is a smaller REIT. But that is a good thing if you are interested in growth.
Simple math tells you that it requires less investment in new properties to have an impact on Agree's top and bottom lines. That has resulted in larger dividend increases, as the chart below highlights. This is not a minor detail, with dividend growth of 70% over the past decade for Agree, dwarfing the 40% that Realty Income achieved. Since Agree is focusing on U.S. retail assets, it lacks the diversification of Realty Income, which likely increases its risk a little. But if you are focused on dividend growth, Agree could be the better choice for you.
O Dividend Per Share (Quarterly) data by YCharts.
Shifting gears at W.P. Carey
It is very easy to dislike W.P. Carey today, given that the REIT did the unthinkable -- namely, it cut its dividend. This was part of what will end up being a transition year for this $13 billion market cap net-lease REIT. That said, it is worth noting that the dividend is already back in growth mode.
So what's going on? W.P. Carey has decided to get out of the office sector, choosing to focus on just the retail and industrial spaces. Instead of exiting the office sector over time, management has ripped off the Band-Aid given the weakness in the office space today. It spun off assets and sold a large number of offices in a short period of time. That removed a huge amount of cash flow and necessitated a dividend cut. But this move has also left W.P. Carey with a lot of cash to redeploy into other properties.
Add in some other moving parts, like a tenant exercising its right to buy the properties it occupies and a few tenant-specific headwinds, and 2024 is going to be a tough year for W.P. Carey. But the future looks like it could be much brighter. That's not only driven by the cash it has waiting to be invested but also the REIT's large number of leases with inflation-linked rent escalators. For investors that like turnaround stories, W.P. Carey could be a more attractive option than Realty Income.
The yield story
W.P. Carey's yield is 5.7% versus around 5.6% for Realty Income. That said, W.P. Carey likely has more upside potential as Wall Street starts to appreciate the changes it is making in its business. Agree's yield is just 4.9%, but given the more attractive historical growth rate in its dividend, many investors will still find it a more appealing option than Realty Income. Realty Income is a steady, slow-growth REIT, but that doesn't mean it is the best option for all investors.
