Realty Income is the industry giant and Agree Realty is a budding upstart. Which one you’ll want to own depends on your investment goals.
You likely wouldn’t be making a mistake if you invested in Realty Income (O 1.24%). Nor would it be an error to buy Agree Realty (ADC 1.22%). But while they are very similar in some ways, they are notably different in others. Here’s why you might want to select one of these high-yield stocks over the other.
Realty Income is the name to beat in net lease
Realty Income is the largest net-lease real estate investment trust (REIT). A net lease requires the tenant to pay for most property-level operating costs. Net lease properties are usually single-tenant assets. Although any individual property is high risk given that there’s only one tenant, across a large portfolio, the risks are fairly low. Realty Income owns over 15,400 properties, which is a massive number compared to most of its peers.
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The REIT’s market cap is a huge $50 billion, which is over 3 times larger than its next-closest peer. It is the 800-pound gorilla in the net-lease REIT niche. But it isn’t just big, it is also very well run. Realty Income has an investment-grade balance sheet and a 30-year history of annual dividend increases. This is a very reliable dividend stock.
As for the future, growth is likely to be slow given Realty Income’s vast size. But the company still has a lot of levers to pull on the expansion front. For starters, its portfolio is spread across retail and industrial assets and it has exposure to both North America and Europe (a market in which the net-lease approach is still relatively new). The company’s size and financial strength also give it the ability to take on deals that smaller REITs couldn’t manage, including portfolio transactions and buying smaller peers.
If you don’t mind a slow-and-steady tortoise, and like to own the biggest and best-run companies, Realty Income and its 5.5% dividend yield will be a good fit in your income portfolio.
Agree Realty is a budding upstart
Agree Realty, with a market cap of just $7 billion, only invests in retail properties located in the United States. The company cut its dividend in 2011 when it owned less than 100 properties and a single large tenant ended up in bankruptcy. Back then, it was the poster child for why a large portfolio is important for net-lease REITs. It is a vastly different company today, with over 2,200 properties. While that’s small relative to Realty Income, it is more than enough diversification in the net-lease space to offset both the single-tenant and portfolio-size risks.
Agree’s balance sheet is investment grade. And it has raised its dividend annually for roughly a decade. This is where things get interesting and you start to see the important differences between Realty Income and Agree. Over the past 10 years, Agree’s dividend has increased by roughly 5.7% a year on an annualized basis. Realty Income’s dividend rose closer to 3% a year over that span.
While the gap between roughly 6% and 3% may not seem like much on an absolute basis, it is a huge percentage difference. Agree is essentially the fast-growing upstart in this comparison. Given its significantly smaller size, that’s a situation that’s unlikely to change for a long time. It is also why investors have afforded the REIT a premium price — the yield is 4.5% or so, a full percentage point below that of Realty Income.
O Dividend Per Share (Quarterly) data by YCharts
All told, this well-run net-lease REIT is going to be attractive to investors focused on dividend growth. It will also be of interest to growth-and-income investors. Realty Income, meanwhile, will probably be favored by those seeking the largest and best-run companies in a sector and the highest yields.
Either one will work, but you might have a preference
Neither Realty Income nor Agree Realty are bad net-lease REITs. The choice between them, in some ways, comes down to the nuances in your investment style. On the other hand, you could just buy both of them, which would give you exposure to both the industry giant and a fast-growing upstart.