Income investors have plenty of dividend-stock choices at their disposal, but it pays to keep the list of holdings in your portfolio diversified. One great way to do that is by owning some real estate investment trusts (REITs).
But if you favor conservative investments, you'll probably want to look at the net lease niche of the broader REIT sector. Here are three specific net lease REITs to consider buying in June.
What's a net lease REIT?
A net lease requires the tenant of a property to pay for most property-level operating costs. Generally speaking, net lease properties are occupied by a single tenant.
There are two takeaways here. First, the landlord's cost and risk are reduced because the tenant has to deal with operating costs, which will rise with inflation. Second, any individual property is a big risk because there's just one tenant. This risk can be solved, however, by having a large portfolio.
Image source: Getty Images.
The net lease model is used with various types of properties, from retail to industrial. But there are notable differences along the spectrum. For example, retail properties are often similar in nature, easily bought and sold and fairly simple to release if a vacancy arises. At the other end of the spectrum, office properties are large, require a material investment to upgrade when bringing in new tenants, and are hard to sell.
In the middle are industrial properties, usually just large buildings, but location can be a big determinant of success. With that quick backdrop, it's time to look at net lease REIT giant Realty Income (O +0.87%), up-and-comer Agree Realty (ADC +0.26%), and turnaround story W.P. Carey (WPC +0.28%).
Realty Income is the biggest and the best
Realty Income's market cap is more than three times that of its next closest peer, which happens to be W.P. Carey. It owns more than 15,400 properties, which is a huge number of assets that more-than-easily offsets the risk of a vacancy at any single property. The stock yields around 5.8% today, and the dividend has been increased annually for three decades.
The REIT's portfolio is largely made up of retail assets (roughly 75% of rents) but has exposure to the industrial market. And it has growing exposure to Europe, a region that's just starting to embrace net leases.
NYSE: O
Key Data Points
The real story, however, is Realty Income's size. It's a slow-and-steady tortoise because it requires a huge amount of investment to move the needle on the top and bottom lines.
However, the vast scale of the business, along with an investment-grade-rated balance sheet, provides it with advantaged access to the capital markets, so it has a cost advantage when it comes to buying properties. If you're the type of investor who likes to stick with industry leaders, Realty Income will be the right choice for you.
Agree Realty can push the dividend accelerator
Compared to Realty Income, $6 billion market cap Agree Realty is a minnow. It "only" owns around 2,100 properties, which is more than enough for portfolio diversification purposes but is still a relatively small number when pitted against 15,400.
In addition, Agree is entirely focused on the domestic retail segment of the net lease space. But these differences are actually potential benefits, as well, particularly when it comes to the scale of the portfolio.
NYSE: ADC
Key Data Points
While Realty Income has to invest huge amounts to grow its business, Agree can ink much smaller deals and still achieve substantial results. That means growth is easier to come by, and the REIT can cherry-pick assets, to some degree.
The proof is in the pudding. Over the past decade, Realty Income's dividend has grown by 40%, while Agree's dividend has increased by a touch over 70%. Agree's dividend yield is 4.9% right now, which is a little lower than what Realty Income is offering, but the potential for more rapid dividend growth will likely attract more than a few investors.
Ripping the bandaid off at W.P. Carey
The second-largest net lease REIT is W.P. Carey, with a market cap of around $12 billion. It's currently yielding roughly 6.1%. However, there's some bad news here.
The REIT is exiting the office sector and, as such, decided to reset its dividend in 2023. That dividend cut has left investors with a bad taste in their mouths, but the decision to get out of the office sector is probably a good one. Realty Income did the same thing not too long ago, but without cutting its dividend.
NYSE: WPC
Key Data Points
At this point, W.P. Carey's portfolio is split between industrial (35% of rents), warehouse (28%), and retail (22%), with a small exposure to self-storage and "other" assets. That's different than Realty Income and Agree and makes W.P. Carey a potential complementary holding. Notably, W.P. Carey also invests in Europe.
The big question is whether or not W.P. Carey can get back into growth mode. It has already started increasing its dividend again, which was an important signal for investors.
But the portfolio reset probably won't be complete until the start of 2025, so W.P. Carey is likely most appropriate for investors with a slightly higher risk profile. However, if management lives up to its promises, W.P. Carey could end up being an attractive turnaround option that pays you well while you wait for it to materialize.
Plenty of choices in the net lease REIT niche
There are other choices in the net lease REIT sector, but this trio covers some key investment themes. Realty Income is for those who want to own the biggest and best, while Agree is a solid choice for those who favor dividend-growth stocks. W.P. Carey is the turnaround story. Take a closer look, and one of these REITs may find its way into your portfolio in June.
