If you’re looking for high-yield dividend stocks, the best place to start is looking in the real estate investment trust (REIT) industry. This corporate structure is specifically designed to pass income to shareholders through large dividend payments.
But not all REITs are the same. Net-lease REITs like Real estate income(NYSE:O), W. P. Carey(NYSE: WPC)And NNN REIT(NYSE: NNN) are some of the safest income choices available. This is why this trio can keep you sleeping soundly for ten years or more, while collecting big dividend checks.
If you had a rental property, you collect the rent, but you are responsible for the maintenance of the property and taxes, among other things. That’s pretty common, but net lease REITs have leases that require their tenants to pay most of the operating expenses at the property level. That may sound strange and perhaps even undesirable for the tenant, but it is actually a win/win situation for both the landlord and the tenant.
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Net lease transactions are often capital raising events where a company sells a property it owns and uses in a so-called sale/leaseback transaction. The key is that the property, whether a retail location, factory or warehouse, is an essential asset to the company’s operations. It wants to ensure that the property is maintained to high standards. So it’s a good thing to maintain that responsibility, even if it means paying all the costs at the property level.
But don’t forget that the seller can also generate cash from the sale, which can be spent on growth initiatives or strengthening the balance sheet. So a net lease allows it to effectively maintain control of the asset even while raising the necessary cash.
On the other side of the deal, net lease REITs such as Realty Income, WP Carey and NNN REIT will get a new property, increasing cash flows. They will also get a tenant who will probably strengthen their activities. So that is also a win for the buyer. The only problem is that net lease assets are usually single-tenant properties, so any individual ownership carries a high level of risk.
However, if you own enough properties, the risk is quite low thanks to the benefits of diversification. Realty Income, WP Carey, and NNN REIT are three of the largest net lease REITs out there, so their individual real estate risk is very low.
Realty Income is the largest of this trio, and the largest in the net leasing sector, with a market cap of $55 billion. The dividend yield is an attractive 5%. (For reference, the average REIT yields about 3.7%). Realty Income has increased its monthly dividend every year for 29 years. Because it is so large, the REIT typically has privileged access to the capital markets, meaning it can compete aggressively for real estate and still make a profit.
Another advantage of owning Realty Income is that its more than 15,400 real estate portfolios are spread across North America and Europe. It owns both retail properties (73% of rents) and industrial properties (17%), with a fairly large ‘other’ category (including things like casinos and vineyards) rounding it out. In short, it has multiple levers to grow its business over time. Considering its size, it is a slow and stable turtle, but also a very reliable one.
NNN REIT is a little more focused and only owns about 3,500 retail properties in the US. However, it has increased its dividend every year for an even more impressive 35 consecutive years. The dividend yield today is around 4.8%, which is also well above the REIT average, although slightly lower than Realty Income’s yield. What sets NNN REIT apart from the rest is its relationship-driven model.
Since 2007, about 72% of its acquisitions came from vendors it already had a relationship with. Perhaps more surprising, the returns on these investments were higher than the returns on the assets that NNN REIT bought on the open market. This is because the existing partners know they can go to NNN REIT and get a deal done quickly. They are willing to pay a premium for the security that NNN REIT provides, and shareholders can benefit from the solid and growing income stream that these relationships create over time.
The problem child here is WP Carey, which has the highest return at 5.9%. This is at least partly because the Net Lease REIT cut its dividend in early 2024, just shy of reaching 25 years of consecutive annual dividend increases. But don’t throw WP Carey off your list. The dividend cut was actually a dividend reset, as the second-largest net lease REIT (with a market cap of about $13 billion) exited the troubled office sector.
Exposure to offices was roughly 16% of rents, so it could not exit the sector without a dividend reset. The important fact here is that the dividend immediately returned to the quarterly growth rate that existed before the cut. The much higher dividend yield means you get paid well for the extra risk, which seems quite modest.
If you can look past the dividend reset, WP Carey’s company is something of a mirror image of Realty Income’s portfolio. WP Carey operates in North America and Europe, but its portfolio of nearly 1,300 properties is focused on industrial assets for approximately 64% of rents, with retail at 21% and other at 15%. While not as large as Realty Income, WP Carey’s departure has left it with capital to invest. So the near-term growth prospects are likely to be attractive and possibly better than what you’d get with Realty Income or NNN REIT.
Realty Income, WP Carey, and NNN REIT are the types of landlords you can own and reliably collect dividends year after year. Yes, WP Carey’s dividend history requires some understanding. However, once you realize that the REIT’s move has strengthened its future prospects, the view on that dividend revision changes (and the relatively high yield becomes much more attractive). Buy one of these REITs, or all of them, if you want to accumulate decades of income while you sleep through the night.
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Reuben Gregg Brewer has positions in Realty Income and WP Carey. The Motley Fool holds positions in and recommends Realty Income and Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.
Buy these 3 high-yield dividend stocks today and sleep soundly for ten years. originally published by The Motley Fool
