When you invest in dividend stocks, the one thing you don’t like to see is a dividend cut. Unfortunately, they do happen and sooner or later you will probably have to deal with them in your portfolio. How you handle a dividend cutter can largely depend on the company’s activities and its future prospects.
A good case study on both sides of this situation involves two dividend stocks I own that have cut their dividend. Right off the bat I will say that I am so disappointed with my long term investment in Ventas (NYSE: VTR) and so happy to continue owning it W. P. Carey (NYSE:WPC). If you’re looking at dividend stocks right now, WP Carey is the better choice.
Here’s what you need to know and why I’m about to give up on Ventas.
What happened to Ventas?
Ventas is a real estate investment trust (REIT) that owns senior housing, medical offices and medical research facilities. It is one of the largest healthcare REITs and is generally well respected on Wall Street. That said, a significant portion of the senior living portfolio consists of what are known in the industry as senior living operating assets, or SHOPs. This means that Ventas owns and operates the properties.
Technically, it hires another company to operate the assets on its behalf. But this is still very different from renting out a property, because the performance of SHOP assets flows through to Ventas’ top and bottom line results. In good times this can boost turnover and profit. When times are bad, it can lead to very troubling financial performance. The SHOP portfolio was the reason Ventas had to cut its dividend during the height of the coronavirus pandemic. With more moves and fewer moves, cash flow was under severe pressure. And then it had to do with tenants who rented senior housing and who were in the same predicament.
The dividend cut made perfect sense and that’s why I decided to keep Ventas even after a dividend cut. But that was a long time ago and Ventas has talked about the growth opportunities ahead as occupancy rates increase. In fact, funds from operations (FFO) rose 7% year-over-year in the second quarter of 2024, led by 15.2% net operating income growth in the REIT’s SHOP portfolio.
Looks like Ventas is out of the woods. Only Ventas has still not started increasing the dividend. Not even a symbolic increase. The cut happened in mid-2020, so that’s a very long time without even trying to regain dividend investor confidence. I’m starting to get the feeling that Ventas’ focus is not where I want it to be, which is to provide a reliable and growing income stream to investors (like me!).
What happened to WP Carey?
One of my biggest issues here is that REITs are specifically designed to pass income to shareholders. As long as they pay out at least 90% of taxable profits as dividends, they avoid corporate taxes. That’s actually a fairly low threshold, because taxable income is affected by non-cash expenses such as depreciation (which is material for real estate). In fact, it’s likely that Ventas could at least try to do a little more, just to signal to investors that the company hasn’t lost its way. Therefore, most dividend investors will probably be better off with net lease REIT WP Carey at this point. (Under a net lease, tenants must pay most of the operating costs at the property level.)
To be fair, Ventas’ dividend yield of 2.8% is well below that of WP Carey, which offers a yield of 5.6%. But there is a more fundamental problem here. WP Carey is one of the most diversified REITs you can buy, with assets in the warehouse, industrial and retail sectors, with a fairly large ‘other’ category to round it all out. In addition to its North American portfolio, it also has a substantial presence in Europe. That said, management made the decision to exit the office assets in late 2023.
The continued impact of the pandemic on the office segment was the main driver for this choice. But with offices making up 16% of the portfolio, this change could not be implemented without a dividend reset. Not ideal, but understandable, just as it was understandable that Ventas cut its dividend due to COVID-19. And since WP Carey is a large and well-respected net lease REIT, it made sense for me to stick with the stock.
This is where the main difference between WP Carey and Ventas comes into play. The quarter after WP Carey revised its dividend, it started rising again. Since the reset, the dividend has increased every quarter and has returned to the quarterly increase rate that existed before leaving office. In other words, WP Carey is clearly telling dividend investors that they are important. Unlike Ventas, WP Carey is already working to regain trust on Wall Street.
Buy WP Carey for more than the return
Ventas is generally a well-managed healthcare REIT, but WP Carey is a well-managed REIT that also recognizes the importance of returning value to shareholders through regular dividend increases. I’m starting to look for an exit plan with Ventas at this point, but I have no intention of replacing WP Carey. And if you’re looking at high-yield stocks, you might want to add WP Carey to your short list. Management clearly believes that your dividends are important.
Should you invest $1,000 in WP Carey now?
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Reuben Gregg Brewer has positions at Ventas and WP Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
1 High-Yield Dividend Stocks to Buy and 1 to Avoid was originally published by The Motley Fool
