When a company increases its dividend every year, it is sending a signal to investors. At 25 years the company reaches Dividend Aristocrat territory, a major achievement and one that often gets dividend investors’ attention. But the best time to buy a company is often before it becomes a Dividend Aristocrat. And W.P. Carey (NYSE:WPC) is one high-yield stock you should think about buying before it hits 25 years of dividend increases.
The record as it stands
Real estate investment trust (REIT) W.P. Carey has 23 years worth of annual dividend increases under its belt. That amounts to a dividend increase every year since the company went public in 1998. That means it’s just two years away from becoming a Dividend Aristocrat. W.P. Carey’s dividend yield, meanwhile, is a very generous 6.3% today, well in excess of the roughly 1.7% you would get from the S&P 500 Index. It’s also much higher than the 3.8% average yield of a REIT, using Vanguard Real Estate ETF as a proxy.
The average annual dividend increase over the past decade has been 7.5%, which handily beats the roughly-3% historical average for inflation over time. That said, more recent increases have been much smaller, with the five-year average at roughly 3% or so, and more recent hikes in the 1.5% space. There are reasons for this, however, including a move to simplify the business by exiting an asset management operation. And don’t forget that over the nine months or so the REIT sector has been dealing with the headwinds from the global pandemic.
However, highlighting the strength of its business, W.P. Carey has collected virtually all of its rents through the turbulence surrounding COVID-19. That’s a period during which some of its closest peers have seen rent collections fall into the 50% range. Meanwhile, on the dividend front, W.P. Carey has increased its dividend by a token amount each quarter so far in 2020. The board is making a very big statement about the strength of this REIT.
The core of the business
W.P. Carey is a net-lease REIT. Essentially, it owns single-tenant properties, and its tenants are responsible for most of the operating costs of the assets they occupy. It’s generally considered a fairly low-risk approach to owning real estate. Further, W.P. Carey tends to buy properties directly in sale/leaseback transactions. Buying directly allows W.P. Carey to dictate the lease terms, and provides it with greater access to the seller’s business during the due diligence phase. Thus it has a really good handle on the finances of its lessees and generally strong contract protections. The sellers, meanwhile, raise cash that they can use for growing their businesses or paying down debt while retaining access to important properties — so they will usually sign long-term leases. It’s a win/win transaction.
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