Investors may have written this REIT off after it cut its dividend. However, it’s become a compelling buy with a juicy and now-trustworthy 6.4% yield.
It’s hard to find dependable dividend stocks with large yields. Often, a high dividend yield is a red flag, a warning from the market of potential risks within the company. However, certain types of companies are better suited to affording generous dividends.
Real estate is a great place to look. Companies that acquire and lease property, called real estate investment trusts (REITs), must distribute at least 90% of their income to shareholders to avoid paying corporate income tax. W.P. Carey (WPC 0.83%) was a highly regarded REIT but encountered some challenges after the pandemic and cut its dividend.
Today, the stock is down nearly 40% from its high. Given the dividend cut and the stock’s decline, it’s easy to say, “I’ll pass.”
Yet, that could be a big mistake. I’ll explain what makes W.P. Carey a top-notch REIT worth buying today and holding potentially forever.
Why W.P. Carey’s dividend cut isn’t a deal-breaker
Most investors hold REITs for the dividend income, so cutting the dividend will (naturally) not go over well. Here’s what happened. W.P. Carey had significant exposure to office properties, which became troublesome after COVID-19 due partly to lockdowns and work-from-home policies. Approximately 16% of W.P. Carey’s rental income came from offices.
W.P. Carey decided to spin off its office properties (it wasn’t the only REIT to do so), which prompted a dividend cut last year:
WPC Dividend data by YCharts
Note that management has resumed dividend increases. However, it will take time for W.P. Carey to grow enough to pay as large a dividend as it once did. Analysts expect W.P. Carey to grow its funds from operations (FFO) at a low to mid-single-digit rate over the next few years.
Why another dividend cut is unlikely anytime soon
The story of W.P. Carey’s dividend cut is somewhat ironic because it’s one of the most diversified REITs.
The company owns approximately 1,430 properties and leases to 346 tenants. W.P. Carey focuses on single-tenant commercial properties and uses net leases, meaning the tenant is responsible for the property’s overhead expenses, such as taxes, maintenance, and insurance. That de-risks W.P. Carey from unexpected costs. It also has a self-storage portfolio of 78 additional properties.
Its properties are divided roughly 2-to-1 between North America and Europe. Additionally, no tenant represents more than 2.7% of its rental income, and its top 10 combine for just 20%. Its properties include industrial buildings, warehouses, retail buildings, and others. The tenants come from dozens of end markets, ranging from retailers to cargo transporters.
It’s hard to see the company suffering another setback like it did with its office properties. Previously, W.P. Carey had raised its dividend for over two decades, including through the financial crisis in 2008-2009, one of the worst since the Great Depression. W.P. Carey can comfortably afford its current dividend, as it’s only 76% of its estimated FFO per share.
Why is the stock still down so much? Look at Treasuries
So, W.P. Carey has essentially right-sized its dividend. The math behind it makes sense now. Additionally, the REIT is well positioned for the future thanks to remarkable diversity through its property and tenant base.
Why is the stock down 40% from its high?
At this point, I think it’s more about interest rates than W.P. Carey’s dividend safety. In September, the Federal Reserve began reducing the federal funds rate (FFR). It’s the Fed’s primary monetary policy tool, but it impacts short-term borrowing rates. Long-term debt, such as mortgages or corporate debt, depends on the 10-year U.S. Treasury rate (yield).
A high 10-year rate can impact REITs in two ways. First, it makes borrowing more expensive. Remember, REITs distribute their taxable income, so they use debt and issue stock to fund their growth. Second, high rates make REITs and other high-yield stocks less attractive to investors because they can find similar yields elsewhere for less risk.
Below, you can see how W.P. Carey’s stock price and the 10-year Treasury rate have gone in opposite directions. The dividend cut helped sink the stock, but high rates are keeping the stock down.
WPC data by YCharts
Several factors can impact 10-year Treasuries, so there’s no telling how high or low rates will go. The good news is that rates fluctuate over time, and they don’t speak to whether W.P. Carey is a good business. Long-term investors can be patient and get paid a generous dividend while waiting out the storm. Despite the recent dividend cut, W.P. Carey is a proven, well-diversified REIT that can add hefty income to any investor’s portfolio.