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Thinking of Buying Realty Income? Buy This Instead

Nov 14, 2020 by Reuben Gregg Brewer
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There's no question Realty Income (NYSE: O) is a well-run real estate investment trust (REIT); more than 25 years of annual dividend increases is proof. But it isn't the only net lease REIT you can buy and, for some investors, it might not even be the best one. In fact, higher-yielding W.P. Carey (NYSE: WPC) may be a better REIT in very important ways. Here's what you need to know.

Dividend streak

It's understandable REIT investors would key in on a company's dividend history, given that the corporate structure is designed to pass income on to shareholders. Realty Income's streak of 27 annual dividend increases in a row is very impressive, putting it in Dividend Aristocrat territory. However, W.P. Carey isn't far behind, with 23 years' worth of annual dividend increases under its belt. But don't pass it over because the streak is a little shorter than Realty Income's -- W.P. Carey has increased its dividend every year since its IPO in 1998. It truly stands toe to toe with Realty Income here.

Dividend yield

Realty Income's yield is around 4.4%, well more than what you'd get from an S&P 500 Index fund, SPDR S&P 500 Trust (NYSEARCA: SPY) which yields roughly 1.6%, and the average REIT yield of 3.7%, using Vanguard Real Estate ETF (NYSEMKT: VNQ) as a proxy. However, W.P. Carey's yield is an even more robust 6.1%. So, if you're a dividend investor looking to maximize your current income, W.P. Carey looks more desirable than Realty Income here.

Portfolio diversification

Both Realty Income and W.P. Carey are net lease REITs, which means they own single-tenant properties for which the tenants are responsible for paying most of the operating costs of the assets they occupy. It's a fairly low-risk investment approach that generally involves long-term leases with built-in rent escalators.

However, these two REITs take slightly different approaches. Realty Income's portfolio is heavily weighted toward retail assets, which make up 85% of its rent roll. The rest is spread across the industrial (10%), office (3%), and "other" categories (the remainder, largely an opportunistic vineyard investment). About 4.5% of its rents come from the United Kingdom.

There's some diversification there but not all that much when you compare it to W.P. Carey's portfolio, which is spread across the industrial (24%), warehouse (23%), office (23%), retail (17%), self storage (5%), and "other" (the remainder) categories. Meanwhile, 37% of W.P. Carey's rent roll is derived from outside the United States, largely Europe. If you think diversification is a winning strategy, W.P. Carey takes another point.


There are a number of ways to look at valuation, but one of the easiest is simply examining a company's historical yield trends. On that front, Realty Income's yield is about in the middle of its 10-year range. That suggests that the REIT is probably fairly valued. While paying full price for a great REIT is hardly a bad thing, W.P. Carey's yield is in the upper half of its 10-year range. That suggests it's relatively inexpensive today, which, once again, gives it an edge over Realty Income.

The winner is...

It wouldn't be correct to say that Realty Income is a bad REIT or a poor investment option. In fact, it's a very well-run landlord and looks fairly valued right. However, W.P. Carey can stand toe to toe with Realty Income and actually looks more attractive in some ways, including yield, diversification, and valuation.

If you're looking at Realty Income, you'd be wise to do a deep dive into W.P. Carey. You might find you end up buying W.P. Carey instead.

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Reuben Gregg Brewer owns shares of W. P. Carey. The Motley Fool owns shares of and recommends Vanguard REIT ETF. The Motley Fool has a disclosure policy.