As interest rates started to rise two years ago, investors soured on the real estate investment trust (REIT) sector. That isn't shocking, since REITs make use of debt to buy property. But the short-term pain of higher interest costs won't derail the long-term opportunity in the REIT sector, since property markets have historically adjusted to interest rate changes.
If you are looking for income today, you'll want to look at REITs Agree Realty (ADC 0.93%), Realty Income (O -0.47%), and NNN REIT (NNN 1.32%). Here's why.
A common theme
The factor that links Agree Realty, Realty Income, and NNN REIT is the net lease approach. A net lease requires the tenant to pay most property-level operating costs, including things like maintenance and taxes. This allows the tenant to control what is a vital property for them and frees up the REIT to focus on growing its portfolio. With a large enough portfolio, meanwhile, net leases are a pretty low-risk way to invest in real estate.
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All three of these REITs invest heavily in the retail sector. Net lease retail properties tend to be fairly similar to each other. That means it is easy to buy and sell them. It is also easy to re-tenant a well-located asset if there's a vacancy. For more conservative dividend investors, owning a net lease REIT, or even three, makes a lot of sense. The real question is what type of dividend stocks you would like to own. You have options in the net lease space.
Buy Agree Realty for dividend growth
Agree Realty has grown rapidly over the past decade, expanding its portfolio from 130 properties in 2013 to 2,135 in 2023. That's supported the REIT's 6% or so annualized dividend growth over that span. To be fair, that's not huge on an absolute level, but it is fairly high for a REIT, so Agree is rewarding investors very well for owning the stock.
The big story here is dividend growth, and that is exactly what separates Agree from Realty Income (3.4% average annual dividend growth over the past decade) and NNN REIT (3.3% growth). That said, the size of the REIT is also important, given that it owns far fewer properties than industry giant Realty Income, which has a portfolio of 15,400 assets. That suggests there's still a very long runway for growth ahead for Agree Realty. Wall Street's short-term concern around interest rates, meanwhile, has pushed the dividend yield up toward decade highs at nearly 4.9%.
Buy Realty Income to own the industry giant
As noted above, Realty Income has a massive portfolio of properties. It is, by far, the largest net lease REIT you can buy. It is also a very well-run company; it has increased its dividend annually for 30 consecutive years and it has an investment grade rated balance sheet. The yield is also near decade highs at 5.9%. The trade off for that higher yield is slower dividend growth, as noted above. Realty Income is more of a slow and steady tortoise.
But there are some other things to consider. For starters, Realty Income's size and financial strength allow it advantaged access to capital markets. That means it can bid on assets aggressively and still make profitable investments. It can also act as an industry consolidator, buying smaller competitors.
In addition, its size has allowed it to reach beyond the U.S. net lease market to Europe, giving it another lever for growth over the long term. It offers a little more diversification because it owns a modest number of industrial net lease assets in addition to its primary focus on retail properties. If you are a conservative investor and prefer to own dominant companies, in the net lease space that's Realty Income.
Buy NNN REIT for consistency
The last REIT up here is NNN REIT, which has increased its dividend annually for 34 years. That's four more years than Realty Income, making this the most consistent dividend payer on the list. According to the company, that's the third-longest streak of any REIT. What's even more interesting is how NNN REIT has grown its business over time, with more than 70% of its acquisitions since 2007 coming from retailers with which it already had a working relationship.
What's that really mean for investors? NNN REIT is, effectively, growing along with the retailers in its portfolio. It is a reliable partner that is a go-to source of capital when retailers want to sell assets to raise cash for expansion. NNN REIT isn't the largest REIT out there, with a portfolio of around 3,500 properties. But it knows its tenants well because it has worked with most of them for years. And those relationships have resulted in slow and steady growth over time. Investors benefit from the dividend growth that produces and the sleep-well-at-night feeling they'll get from a relationship-driven REIT with an impressive dividend track record.
Act now while you still can
Even if you only have $500 to invest you'll want to consider putting that cash to work in one, or more, of these net lease REITs. Wall Street is downbeat on the sector, but Agree, Realty Income, and NNN REIT haven't skipped a beat. They are still the same companies they were before. Acting now will allow you to add companies with historically high yields and still strong long-term prospects to your portfolio. Ultimately, getting paid well to wait for property markets to adjust to higher rates should sound like a pretty good plan if you are a dividend maven.
