There are several sectors where income investors go for high-yielding stocks. Of course, wise investors do their homework and know to expect certain risks. Utilities are the favorite of risk-averse investors. Those of a more daring disposition often turn to real estate investment trusts (REITs) and master limited partnerships (MLPs). Our pick for today is W.P. Carey Inc (NYSE: WPC). This New York City-based REIT has a very solid history of dividend growth. On top of that, the stock offers a 6% yield right now.
The corporate story of WPC
WPC opened for business in 1973 and went public in 1998. It became a REIT in 2012.
This self-managed REIT focuses on commercial real estate, operating in the sale-leaseback and net-lease space. What gives WPC a high degree of stability is the diversification of its portfolio by geography, property type, and industry. Most of its assets are located in the United States and Europe. However, the company also own properties in Australia, Japan, Thailand, and Malaysia. In terms of property type, the portfolio includes industrial, office, retail, warehouse, and storage.
WPC also has an investment management segment. As of March 31, 2017, the company had about $13 billion of assets under management in non-traded, publicly-registered and private investment programs.
WPC closed 2016 with more than $23 billion in assets under management. It currently has a market capitalization of about $7.1 billion.
Since its IPO through the end of February 2017, WPC delivered total returns of 955%. This compares to 249% for the S&P 100 index over the same timeframe.
Early in May, WPC released its financial report for the first quarter of 2017. At first glance, it looks as if the numbers got worse.
Net income was basically flat at $57.5 million. Adjusted funds from operations (AFFO) declined by 4.6% year-on-year to $1.25 per diluted share. However, the drop largely reflected asset dispositions and a prior-year boost from lease termination income.
In a sign that it was happy with its quarterly performance, WPC reiterated its projections for full-year AFFO of $5.10 to $5.30 per diluted share. In addition, the company increased its dividend to $0.995 per share from $0.990.
WPC has raised its annual dividend every single year since going public. In addition, it paid special dividends in 2007, 2009, and 2013.
The current annualized distribution comes at $3.98 per share. After the recent uptick in WPC’s share price, the yield has slipped a bit but remains highly attractive at 6%.
Pros and cons
What makes REITs so attractive for income investors are obviously their generous yields. However, these are largely the result of statutory provisions. More specifically, the tax relief that comes with a REIT structure requires the distribution of at least 90% of taxable income among shareholders in the form of dividends.
While this is great for investors, REITs have to secure growth capital through other means. Since most of their cash flow goes towards dividend payments, they need to tap debt and equity markets for investment capital. This brings up to one key risk for REITs: interest rate increases.
One thing that could put off some investors is the recent slowdown in dividend growth. WPC is unlikely to experience difficulties in raising the payout. However, it may have opted to make smaller hikes in anticipation of further interest rate increases.
As we noted earlier, WPC benefits from a highly diversified portfolio. Importantly, the company has only marginal exposure to US retail properties. The struggles of traditional retailers have made retail REITs quite unappealing for investors.
WPC currently has 900 properties with 214 tenants. The occupancy rate is 99.1%, while the average lease term is 9.6 years. This suggests that the company is set to deliver stable cash flows for at least another decade.
Over the past 52 weeks, the stock has traded in the range of $55.77 to $72.89. At the time of writing, the share price is $66.45. Some investors may prefer to wait for a bit of a pullback. On the other hand, WPC is trading at a forward P/E multiple of just 12.8.
Given the stability and solid prospects of this REIT, income investors should consider betting on it. Dividend growth may prove very modest over the next few years. However, WPC can offer safe payouts and attractive yields, which makes it a good investment for the long term.
I do not have a financial interest in any of the companies featured in this article, nor do I plan on having one within the next three days.
This article reflects my opinions. The company is not paying me to write it and I do not have any business relationship with any companies mentioned in it.