Famed investor Warren Buffett has said that the best holding period on a stock is forever, but not many stocks involve businesses that have the economics to warrant that level of holding. Sooner or later, growth finally slows as just about every business starts to lose its grip on its sustainable competitive advantages.
But there is one business type that has better tools to help it stand the test of time: Real estate investment trusts (REITs). REITs own and lease real estate properties. In exchange for hefty breaks on corporate income taxes, REITs must pay out the vast majority of income as dividends to shareholders. This distinction along gives REITs a leg up as a long-term investment option. Stocks that pay no dividend don't really offer a return until you sell.
The REIT we'll talk about today, W.P. Carey (WPC -0.42%), is set up well for a holding period of forever thanks to its portfolio diversification, low volatility, and growth prospects. It also currently sports a 5% dividend yield.
Diversification helps W.P. Carey stand out
The REIT owns 1,390 properties with 390 different tenants. Its biggest property type concentration -- industrial -- makes up just 27% of its portfolio. Warehouse, office, retail, and self-storage all account for at least 5% of the portfolio. Dig deeper into industry types, and the largest concentration (at 20%) is retail stores. Fourteen other industry types make up at least 2% of the portfolio. There's geographic diversification too. Five of its top 10 tenants and 36% of its expected revenue come from outside the U.S.
W.P. Carey's diversification is a strength because it helps the company manages the various headwinds that inevitably arise in segments of the economy. Recession in the U.S.? People will use more storage, and there likely won't be the same level of recession in Europe. Strong economic growth? Industrial and warehouse tenants will be growing. Inflation? Well, 99% of its leases have regular contractual increases built in, and 58% of those leases link the rate of increase to the Consumer Price Index.
W.P. Carey is less affected by market volatility
Low volatility is one of the factors that finance academics have identified as leading to strong long-term returns in stocks. Low-volatility stocks may not have the high-flying returns of tech stocks during bull markets, but they usually don't fall much during recessions either.
This not only improves long-term returns, but it makes it easier to hold the stock when the market has a big drop. Many investors would be more successful if they sat on their hands during bear markets and didn't sell. Anything that makes it more likely that you can do that is a plus.
As the market has fallen over the last year, W.P. Carey's stock steadily rose. Its 4.1% return so far in 2022 isn't life-changing, but remember that it also paid out a healthy dividend over that period, and the S&P 500 is down 16.2% over the same timeframe.
In addition to eyeing the chart, we can measure volatility using the stock's beta. Beta measures how volatile a stock has been relative to the index. A beta of 1 means it moves perfectly with the index -- if the index goes up 10%, it goes up 10%. W.P. Carey's beta is just 0.69 over the past five years. That means market whipsaws don't affect its stock nearly as much as a more volatile stock.
W.P. Carey still has growth prospects
W.P. Carey has performed well over the last year relative to the market, but expand that comparison to five years, and you get a different picture -- one of underperformance and little to no growth as the company transforms itself. The REIT has a complicated history of using different financial structures, such as a non-traded REIT and master limited partnership (MLP), to generate revenue that made its financials choppier and took focus away from its core property business.
But the company has completed its transformation and is beginning to reap the benefits from those changes. It also expects those benefits to continue going forward. Today, same-store growth is higher than it's been in years thanks to inflation. Debt makes up just 30% of the balance sheet. The REIT's $2.1 billion in liquidity and strong credit rating give it the ability to grow as many REITs will struggle to refinance debt at higher interest rates.
The REIT currently trades for around 16 times management's guidance for year-end Adjusted Funds From Operation (a more accurate metric for measuring a REITs performance). A ratio of 16 isn't particularly high or low and suggests the market is likely pricing in the REIT's past consistency but not its growth potential. Buying right now would allow you to potentially get a short-term boost from any excess growth over the next few years, while also not paying a high premium for a REIT that is safe to own forever.