Investors who are concerned about the possibility that their investments may be completely depleted before they pass away should consider the income investing strategy. Rather than having to sell your portfolio to fund your lifestyle, income investing can provide you with a steady stream of cash flow to pay your bills.
Having raised its dividend paid to shareholders for 26 consecutive years, the real estate investment trust (REIT) W.P. Carey (WPC -1.67%) has been a reliable investment for yield-focused investors. But should income investors buy the stock and its big dividend yield? Let's dive into W.P. Carey's fundamentals and valuation to get an answer.
A solid business model with growth ahead
W.P. Carey is a net lease REIT that specializes in sale-leaseback transactions. This means that the REIT purchases properties from businesses and releases them to the same businesses on 10-plus-year lease terms with annual rent escalators mostly linked to inflation. W.P. Carey focuses on single-tenant properties with purchase prices in the range of $5 million to $500 million.
Prospective tenants can then use the capital proceeds that they receive from a sale-leaseback transaction in numerous ways, such as investing in future growth opportunities and repaying debt. The win-win proposition of such a business arrangement has played a large role in W.P. Carey's success as a company. The REIT has drawn in nearly 400 tenants to do business with and has grown to more than 1,400 industrial, warehouse, retail, and office properties in the United States and Western and Northern Europe.
Looking forward, W.P. Carey has two meaningful catalysts that can drive growth for it. For one, as large as the company has become in its 50-year history, it's just a fraction of its potential. This is because the net lease market in the U.S. and Europe is estimated to be worth a combined $13 trillion according to estimates from Realty Income, another net lease specialist. That should allow the REIT to remain steadfast in its insistence upon purchasing only the highest quality properties for its portfolio while also moving the needle on growth.
Secondly, elevated inflation throughout the U.S. and Europe caused the company's same-store annualized base rent growth rate to accelerate from just 1.6% in the first quarter of 2021 to 4.3% in Q1 2023. For these reasons, W.P. Carey should have no problem generating low- to mid-single-digit annual adjusted funds from operations (AFFO) per share growth over the next few years.
The payout is well supported
W.P. Carey's 6.1% dividend yield is nearly quadruple the S&P 500 index's 1.6% yield. This high yield is partly because REITs avoid taxes at the corporate level in exchange for distributing at least 90% of their net income (i.e., profits after considering non-cash expenses like depreciation and amortization).Best of all, W.P. Carey's generous dividend doesn't appear to be a yield trap.
This is because the company's dividend payout ratio is poised to register at just under 80% of its AFFO per share in 2023. That leaves the REIT with about $230 million in excess capital. Along with share or debt issuances, these funds can be used to meet its full-year investment volume target of between $1.75 billion and $2.25 billion in 2023 to further build its property portfolio. As long as the company is able to complete acquisitions with capitalization rates above its cost of capital, these acquisitions will create additional wealth for shareholders over time.
W.P. Carey's valuation makes it a no-brainer buy
With the potential for at least one or (maybe) two more interest rate hikes this year, income investments like W.P. Carey have underperformed in 2023. Shares of the stock are down 10% so far this year, while the S&P 500 index has gained 12% during that time.
This weak performance, coupled with growing AFFO per share, has pushed W.P. Carey's forward price-to-AFFO-per-share ratio down to just 13.2 -- a cheap valuation for a proven dividend grower. And if that wasn't enough to convince income investors that the stock is a buy, its trailing-12-month dividend yield of 6% is slightly above the 10-year median trailing-12-month dividend yield of 5.6%.
Given that W.P. Carey's fundamentals look to be intact, this is an attractive valuation. That's not to say that there aren't reasons for shares to be as cheap as they currently are. For one, 44.4% of the company's total debt load is slated to expire between now and 2025, with the vast majority of that coming in 2024 and 2025. If interest rates are kept high for the foreseeable future to tame inflation, this could negatively affect the investment spread between the REIT's cap rates and its cost of capital when it refinances that debt. It's also worth noting that dividend growth has been modest over the past five years, rising just under 5% during that time. But for income investors with moderated expectations of dividend growth looking for a steady REIT, W.P. Carey could be a great pick right now.
Kody Kester has positions in W. P. Carey. The Motley Fool recommends W. P. Carey. The Motley Fool has a disclosure policy.
