Real estate investment trusts (REITs) have been out of favor on Wall Street for the past couple of thanks to interest rate volatility. That’s understandable since higher rates increase financing costs for REITs. However, property markets eventually adjust to higher rates, and the current industry downturn could be an opportunity for dividend growth investors to buy some attractive REITs.
Three REITs to look at today are W.P. Carey (WPC 1.01%), Agree Realty (ADC 0.94%), and Vici Properties (VICI 0.90%). Here’s why.
A turnaround play: W.P. Carey
It might seem odd to talk about W.P. Carey in an article about dividend growth stocks, given that the company cut its dividend at the start of 2024. Or, rather, it reset the dividend. This is a fine distinction but one that truly matters here. At the end of 2023, the net lease REIT decided that it would exit the office sector in one quick move because of the financial troubles the property category faced (a net lease requires the tenant to pay most property-level operating costs). At 16% of rents, W.P. Carey had no choice but to reduce the dividend after making this strategic adjustment. Prior to that dividend reset, the dividend had been increased annually for 24 consecutive years.
Image source: Getty Images.
But how do you know this was a reset? The answer is that W.P. Carey has increased the dividend every quarter since the cut, which is the same exact quarterly increase pattern that existed prior to the cut. Meanwhile, the office exit has left the REIT with cash to invest in new assets, which should return the portfolio to growth. In some ways, W.P. Carey is a better REIT today than it was prior to the dividend cut because it is focused on the stronger-performing industrial and retail sectors.
Income investors, however, react very negatively to dividend cuts, and W.P. Carey has to regain Wall Street’s trust, which will probably take some time. If you don’t mind waiting for this still-strong net lease REIT to prove that the dividend cut was actually just a reset, you can collect a huge 6.5% or so dividend yield (backed by a growing dividend) from a fairly low-risk turnaround play while you wait. For reference, the average REIT is yielding just 3.7%.
Steady as she goes: Agree Realty
Agree Realty, another net lease REIT, cut its dividend way back in 2011 after the bankruptcy of a single, large tenant. However, the REIT was a very different company at that point in time, having started the year with less than 100 properties. At the end of the third quarter of 2024, Agree owned nearly 2,300 properties. In fact, it bought 144 properties through the first nine months of 2024, showing just how much the company’s scale has changed over the past decade or so.
The rapid expansion of the portfolio has had a positive impact on the dividend, which has grown at a compound annual rate of 6% over the past decade. Balance that against the 4.3% yield, which is well above the REIT average, and you have a pretty attractive dividend growth stock.
The most exciting part of the Agree story, however, is the lesson it learned from that dividend cut in 2011. Simply put, it now focuses extra attention on ensuring it works with financially strong tenants. To that end, it has been shifting away from financially troubled Walgreens Boots Alliance for years while expanding its relationship with growing retailers like TJX and Tractor Supply. If you are looking for a high-quality mix of growth and income, Agree Realty should be on your shortlist.
Vici Properties is young but has proven its resilience
The coronavirus pandemic in 2020 was a frightening time for landlords with tenants that the government effectively forced to shut down. The list of so-called non-essential businesses included casinos, which is the property type on which Vici Properties is focused. But in true casino fashion, the house always wins, and the REIT’s gaming tenants continued to pay the rent right through the shutdowns. Vici has increased its dividend each year since it started paying a dividend in 2018 (the REIT held its IPO the same year).
With built-in rent escalators and a net lease business model that has proven it can withstand a global pandemic, Vici and its 6% dividend yield should attract a lot of investor attention. Note that the dividend has grown at a compound annual rate of 7% since the dividend was initiated, more than three times faster than the net lease average.
The one problem with Vici is the lack of diversification, with casinos making up nearly all of its rent roll and just two tenants accounting for nearly three-quarters of the total. All in, this is a bit of a contrarian play, noting that Vici is increasingly looking to expand beyond casinos. If you don’t mind taking on some extra concentration risk (and buying a sin stock), Vici could be a solid dividend growth option for you.
The baby often goes out with the bath water
When investors sour on an entire sector, as has happened to REITs, even good companies can be put on the sale rack. If you are a dividend growth investor, you might want to dig into the REIT sector while others are avoiding it. W.P. Carey is a solid turnaround option and Agree is a simple growth and income story. Sin stock Vici will be an acquired taste, but it is one that has so far proven well worth it for dividend investors.
