Don’t wait for a stock market crash to buy this dividend share
The broad market today offers a frighteningly low dividend yield of just 1.3%, given the large S&P 500 index. Wouldn’t you rather get 5.5% from a company that has a long history of steadily increasing dividends behind it? If so, here’s why you shouldn’t wait until the next market downturn to buy a diverse owner. WP Carey (NYSE: WPC).
A virtue for investors of all kinds
One of the most attractive attributes of WP Carey’s business is its diversification. You know you need to diversify your investment portfolio – well, so do real estate investment trusts (REITs). There are different ways to diversify. For example, a REIT may stick to a single real estate industry and own a large number of properties, so no one asset will have a significant impact on its business. Alternatively, an owner can focus on a specific region with a collection of different types of properties, so that a downturn in, say, office space won’t derail the entire portfolio. WP Carey uses both approaches.
Its portfolio extends to industry (25% of rents), warehouse (23%), office (21%), retail (18%), self storage (5%) and what he calls the “other” categories (the rest). And WP Carey’s portfolio contains over 1,250 properties. That’s a lot of sectors and a lot of properties. Note that some of the real estate niches it serves (such as office space) typically require owning larger individual assets, reducing the total number compared to some of its peers (especially those focused on the retail sector. detail). However, the diversification does not stop there. WP Carey also generates almost 40% of its rents outside of the United States. It is one of the most diverse REITs you can own.
To add to the appeal, WP Carey uses the net lease approach, which is generally considered a low risk way to own real estate. Essentially, he buys properties from companies looking to raise funds for other purposes, such as growth expenses. It then instantly leases the asset to the seller (called a sale-leaseback transaction) with a long-term lease. Additionally, WP Carey tends to include annual rent escalations in most of its contracts, with 60% of its contract increases linked to inflation.
But wait, there is more
So far, there is a lot to love about the business of WP Carey. However, you really have to dig deeper to understand why all of this diversification is so desirable. The management team here tends to be opportunistic, seeking to make the money work where there is value to be gained from it. Being widely diversified by sector and region allows it to do so with relative ease, as it is not locked into any portfolio. For example, at the start of the recession caused by the 2020 pandemic, WP Carey announced that it was looking to start buying industrial assets and warehouses, which turned out to be hot spots due to economic shutdowns. A retail focused net rental REIT could not have done this.
The best part of the story, however, is the success this net lease owner has had in executing his plans. Since REITs are specifically designed to pass income to shareholders, one of the best ways to assess WP Carey’s performance is to look at its dividend history. The REIT has increased its dividend every year since its initial public offering in 1998. That puts it on the verge of achieving dividend aristocrat status, which comes into effect after 25 years of annual dividend increases. Note that this period includes the tech collapse of 2000, the recession of 2007-2009 and the global pandemic in 2020 – WP Carey has continued to raise the dividend throughout these major market upheavals. It’s an impressive level of consistency.
It’s worth acting now
To be fair, WP Carey’s dividend yield has been higher in the past. However, if you’re looking to find a good return in today’s market, it’s hard to argue with the stock’s impressive 5.5% return. And that’s significantly higher than what is offered by some of its peers closest to net lease (in terms of size and history) and average REIT, using Vanguard Real Estate Index ETF as agent. All in all, if you’re a dividend investor, it’s just not worth the wait here.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.