Dividend investors in search of high yields have to find a balance between maximizing income and minimizing risk. Focusing on yield alone will lead you down a dangerous path that could include damaging dividend cuts. But today you can buy W.P. Carey (WPC 0.04%) and its hefty 5.3% dividend yield. You'll sleep well at night knowing that this investment has stood the test of time. Here's why you can trust you'll keep getting paid by W.P. Carey.
A little history
A dividend can be changed at any time by a company's board of directors, a fact which you can't ignore. However, some company boards have proven their dividend commitment in a tangible way. Real estate investment trust (REIT) W.P. Carey is easily such a company. There's a surface reason for this and there are deeper ones.
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First, W.P. Carey's dividend has been increased for 24 consecutive years. That's a dividend increase every year since the company's IPO in 1998. It has already increased its dividend in 2021, so unless something unexpected happens, 2021 will push this REIT into the elite Dividend Aristocrat grouping. Clearly the board considers a growing dividend to be very important.
Only there's more to this story. In 2020, when many REITs ended up cutting their dividends, W.P. Carey increased its dividend. Not once, but four times. That's right, in the middle of a global pandemic, the REIT made clear its commitment to rewarding investors. To be fair, the increases were modest, but the statement was huge. It's also worth noting that the dividend was increased every quarter through the 2007 to 2009 recession, as well. So the pandemic wasn't a one-off event.
But there's one more thing to know about the dividend commitment here. When W.P. Carey IPOed it was structured as a master limited partnership. Like a REIT, this structure is specifically created to pass income on to unitholders, but it is more complex tax wise. W.P. Carey converted to a REIT in 2012. The dividend was increased regularly right through the conversion process. But that's not all. The REIT has historically operated an asset management arm that created and supported non-traded REITs. It has been shutting that business down over the last few years and yet continues to increase the dividend. So, despite major structure changes to its business, W.P. Carey has very clearly shown that the dividend is sacrosanct.
The company behind the dividend
Of course that dividend record couldn't have been built without a great company to back it up.
W.P. Carey is focused on net lease properties, which means it owns all of its roughly 1,260 properties but its tenants cover the ongoing costs of the assets. W.P. Carey basically sits back and collects rents. It's a fairly low risk way to invest in real estate. The key here is that the REIT generally buys properties directly from companies and then leases those assets right back to the former owner. Such sale/leaseback deals are a way for companies to raise cash without having to tap capital markets or take out a loan from a bank. There are a lot of REITs that use the net lease approach, but W.P. Carey was among the first players here and stands out as a pioneer in the space.
In addition to this, W.P. Carey takes an opportunistic approach. There are multiple angles here, including a willingness to work with partners that are below investment grade. Indeed, only around 30% of its tenants have investment-grade-rated balance sheets, which is toward the low end of the net lease sector. However, W.P. Carey believes that its ability to originate leases, and the in-depth review of a company's financials that it demands in such situations, allows it to cherry pick partners that are stronger than they seem.
To make it easier to find great opportunities, meanwhile, W.P. Carey takes a diversified approach with its portfolio. Its rents are broken down between the industrial (25% of rents), warehouse (22%), office (22%), retail (18%), and self storage (5%) sectors. It also generates around 38% of its rents from outside of the United States (mostly from Europe). This gives W.P. Carey a lot of different markets to examine, sector wise and geographically, as it seeks to expand its portfolio and dividend. You know diversification is good for your portfolio, well W.P. Carey has proven that diversification is good for its portfolio, too.
The full package
At the end of the day, W.P. Carey has proven that investors can trust in its dividend through thick and thin, including through big corporate changes. And that's possible because the REIT has been built from the ground up to pay reliable dividends no matter what sector or geographic region is hot at any given time. If you are looking for a reliable high-yield stock today, W.P. Carey is worth a very close look.
