Real Estate Investment Trusts, also called REITs, are very popular among income investors. It is easy to see why — REITs allow investors to invest in real estate, without having to own physical properties.
In addition, REITs are required to distribute at least 90% of their taxable income to shareholders annually in the form of dividends.
This results in high dividend yields across the REIT asset class, which makes them highly attractive as income investments. But investors should focus on the highest-quality REITs, like W.P. Carey (WPC). W.P. Carey routinely increases its dividend nearly each quarter, and the stock has a high dividend yield of 5.6%.
High-Quality Tenants Lead To Strong Cash Flow
W. P. Carey invests primarily in commercial real estate properties such as single-tenant industrial, warehouse, office and retail properties in the U.S. and Europe. It has an enterprise value of approximately $17 billion and a diversified portfolio, with approximately 1,163 net lease properties.
W.P. Carey has a diversified portfolio of long-term tenants. The company ended 2018 with an average lease term of 10.5 years, over 300 tenants and 98.3% occupancy. Such a high occupancy rate and long lease term indicates strong demand for W.P. Carey’s properties.
In addition, the company enjoys a favorable operating structure. Organized as a triple-net REIT, W.P. Carey generates a steady stream of rental income from occupants, while placing most of the operating expenses on the tenants. In addition, W.P. Carey’s tenants have long-term leases with built-in rent increases. This results in a great deal of cash flow for W.P. Carey, which fuels its high dividend payout.
In 2018, revenue increased 7.8% to $835 million. FFO-per-share of $5.38 increased 2% from 2017. W.P. Carey’s primary growth catalyst is acquisitions, including $940 million in acquisitions and redevelopments last year. The company also completed a nearly $6 billion merger with one of its managed funds, to create a leaner business structure and increase efficiency.
W.P. Carey’s current annual dividend payout of $4.12 per share results in a current yield of 5.6%. This is an attractive yield, as the S&P 500 Index yields approximately 2%. Importantly, the company’s dividend appears secure. W.P. Carey has a 2019 expected payout ratio of 82%. This is a high payout ratio, but the dividend is expected to be covered by FFO this year.
The company is a dividend growth stock as well. W.P. Carey increased its dividend payout by 0.5% in December, bringing the total annual payout to $4.12 per share. W.P. Carey’s approach to the dividend is to provide frequent, small quarterly increases in the 0.5% range. The company provided three such increases in 2018.
W.P. Carey is not a high-growth company, but REITs are not typically associated with growth. Instead, they are relied upon for their steady cash flow and high dividend payouts. In these areas, W.P. Carey is an attractive stock. Income investors such as retirees who are interested in REITs should consider W.P. Carey.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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