If you are looking for reliable income, these net lease REITs are each designed to let you sleep well at night.
If you’re looking for high-yield dividend stocks, one of the best places to start your search is in the real estate investment trust (REIT) sector. This corporate structure is specifically designed to pass income on to shareholders via large dividend payments.
But not all REITs are the same. Net lease REITs like Realty Income (O -3.16%), W.P. Carey (WPC -2.17%), and NNN REIT (NNN -2.20%) are some of the safest income choices around. Here’s why this trio could help you sleep soundly for a decade, or more, while you collect big dividend checks.
Net lease REITs are a bit different
If you owned a rental property, you would collect the rent, but you’d be responsible for the maintenance of the property and the taxes, among other things. That’s pretty normal, but net lease REITs have leases that require their tenants to pay for most property-level operating costs. That may sound odd and perhaps even undesirable for the tenant, but it’s actually a win/win for both the landlord and the lessee.
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Net lease transactions are often capital-raising events, where a company sells a property it owns and uses in what is called a sale/leaseback transaction. The key is that the property, be it a retail location, a factory, or a warehouse, is a vital asset to the company’s business. It wants to make sure that the property is maintained to high standards. So keeping that responsibility is a good thing, even if it means paying all the property-level costs.
But, remember, the seller also gets to generate cash from the sale, which can be put toward growth initiatives or strengthening the balance sheet. So a net lease allows it to effectively retain control of the asset even while it raises the money it needs.
On the other side of the transaction, net lease REITs like Realty Income, W.P. Carey, and NNN REIT get a new property, which increases cash flows. They also get a tenant that, presumably, is strengthening its business. So that’s a win for the buyer, too. The only problem is that net lease assets are usually single-tenant properties, so each individual property is high-risk.
However, if you own enough properties, the risk is fairly low thanks to the benefits of diversification. Realty Income, W.P. Carey, and NNN REIT are three of the largest net lease REITs around, so their individual property risk is very low.
A look at Realty Income, W.P. Carey, and NNN REIT
Realty Income is the largest of this trio, and the largest in the net lease industry, with a market cap of $55 billion. The dividend yield is an attractive 5% or so. (For reference, the average REIT is yielding around 3.7%) Realty Income has increased its monthly dividend every year for 29 years. Being so large tends to give the REIT advantaged access to capital markets, which means it can compete aggressively for properties and still turn a profit.
Another benefit to owning Realty Income is that its 15,400+ portfolio of properties is spread across North America and Europe. It owns both retail assets (73% of rents) and industrial assets (17%), with a fairly large “other” category (which includes things like casinos and vineyards) rounding things out. Basically, it has multiple levers to pull when it comes to growing its business over time. Given its size, it’s a slow and steady tortoise, but a very reliable one, too.
NNN REIT is a bit more focused, only owning around 3,500 retail properties in the U.S. However, it has increased its dividend every year for an even more impressive 35 consecutive years. The dividend yield today is around 4.8%, which is comfortably above the REIT average, too, though slightly lower than Realty Income’s yield. What sets NNN REIT apart from the pack is its relationship-driven model.
Since 2007, roughly 72% of its acquisitions were from sellers with which it already had a relationship. Perhaps more surprisingly, the returns on these investments were higher than the returns on assets NNN REIT bought on the open market. This is because its existing partners know that they can go to NNN REIT and get a deal done quickly. They’re willing to pay a higher price for the certainty that NNN REIT offers, and shareholders get to benefit from the solid and growing income stream these relationships create over time.
The problem child here is W.P. Carey, which has the highest yield at 5.9%. This is at least partly because the net lease REIT cut its dividend at the start of 2024, just shy of reaching 25 years of consecutive annual dividend increases. But don’t throw W.P. Carey off your list. The dividend cut was really a dividend reset as the second largest net lease REIT (its market cap is around $13 billion) exited the troubled office sector.
Its exposure to office was roughly 16% of rents, so it couldn’t leave the sector without a dividend reset. The important fact here is that the dividend got right back onto the quarterly increase cadence that existed before the cut. The much larger dividend yield means you’re getting well paid for the added risk, which seems quite modest.
If you can look past the dividend reset, W.P. Carey’s business is kind of a mirror image of Realty Income’s portfolio. W.P. Carey operates in North America and Europe, but its nearly 1,300-property portfolio is tilted toward industrial assets at around 64% of rents, with retail at 21% and other at 15%. While it’s not quite as large as Realty Income, W.P. Carey’s office exit has left it with capital to invest. So growth prospects will likely be attractive in the near term and potentially better than what you’d get at Realty Income or NNN REIT.
Three “sleep well at night” REITs
Realty Income, W.P. Carey, and NNN REIT are the types of landlords that you can own and reliably collect dividends from year in and year out. Yes, W.P. Carey’s dividend history requires a bit of understanding. However, once you recognize that the REIT’s move has strengthened its future prospects, the view of that dividend reset changes (and the relatively high yield becomes much more attractive). Buy one of these REITs, or all of them, if you want to collect decades’ worth of income while you sleep soundly through the night.