The retail sector is gigantic, and there are always companies on the rise even as there are companies that have started to fall. Some interesting examples today include Wingstop (WING -1.70%), Walgreens (WBA -0.22%), and Dollar General (DG 4.09%). They all help explain why I prefer to own retail-focused real estate investment trust (REIT) Realty Income (O -0.09%). Here's why you might want to follow my lead.
Going up and going down
There are any number of reasons to buy a stock, but two popular ones are the hope that the stock price will rise or that the company will continue to pay a reliable dividend. That presents a problem when it comes to the retail sector, because the performance of many retail concepts is tied to fickle consumer demand. One day a concept is hot, the next it's out of favor. That is true both at the customer level and on Wall Street!
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For example, after decades of annual dividend increases, Walgreens eventually ended up cutting its dividend as its pharmacy business slowed down. To be fair, there were a number of self-imposed problems, such as trying to build a medical services business. But the point is that this once very reliable company's business changed, and it was no longer a reliable dividend stock. Now it has agreed to be taken private as it attempts to shrink its fleet of stores. This has not been a great investment.
At the other end of the spectrum, business-wise, would be a restaurant brand like Wingstop. The top line of Wingstop's income statement grew an incredible 36% in 2024, driven by the opening of 349 new locations. The company clearly looks like it is hitting on all cylinders today, but that hasn't stopped the stock from losing more than a third of its value over the past year.
Dollar General is also opening new locations at a rapid clip. A net total of 608 new stores opened in 2024, with a plan to open another 575 in 2025. Yet the company's financial performance has been pretty bad, with 2024 earnings off by nearly 33% year over year. The stock has, not shockingly, been in the Wall Street doghouse.
I choose to punt in the retail sector
Picking winners in the retail sector isn't easy. One-time stalwarts fall from grace. Fast-growing companies suddenly become unpopular with investors, and struggling companies continue expanding. The one thing I know for sure, however, is that all these companies need to put their stores somewhere. That somewhere, assuming it is located well, has lasting value even if the retail concept occupying it goes by the wayside.
This is why I own Realty Income, a REIT that owns over 15,600 properties. Roughly 73% of those properties are single-tenant retail locations. All the properties use a net lease approach, which means that the tenant is responsible for most property-level costs. This materially reduces risk for Realty Income. The company's business model has resulted in three decades' worth of annual dividend increases. And with a dividend yield of 5.7% today, it should look fairly attractive to income investors.
But the key is that Realty Income isn't trying to pick the best retail concept. It's trying to buy well-located properties. This changes the retail dynamic dramatically. There will always be tenants in the real estate investment trust's portfolio that are struggling. But if a tenant vacates a property, Realty Income still owns something of value. It can release the property or sell it fairly easily, assuming the asset is well located.
So, from a conservative income investor's point of view, Realty Income's large portfolio limits the harm that any one property or tenant can cause. Even in the worst-case scenario, there's a relatively easy solution to the problem (re-lease or sell) that will salvage all, or at least part, of the asset's value.
Forget about picking retail winners -- pick Realty Income instead
Long ago, I decided it was too much work to track retail stocks. And tracking them wouldn't necessarily lead to investment success, anyway. My choice was to select a retail-focused landlord. However, my pick of Realty Income is just one of many options you have in the REIT sector. So while I personally recommend Realty Income, you don't have to take my specific advice on the REITs you select (I also own Federal Realty (FRT -1.37%) and W.P. Carey (WPC -1.08%), for example). But I suggest you strongly consider looking at retail-focused REITs over retail stocks.
