This REIT makes its investors instant real estate moguls.
Real estate investing can be very lucrative. It can enable investors to generate passive income and capture price appreciation.
However, real estate investing can also be stressful. You need to find the right property, deal with tenants, manage contractors to make repairs, and navigate through a host of legal, tax, and accounting information. Because of that, buying a commercial property isn't for everyone.
A much less stressful way to invest in real estate is to buy shares of a real estate investment trust (REIT).W.P. Carey(WPC 0.14%) is a great option to consider.
An ultra-low-risk REIT
W.P. Carey is a large diversified REIT. The company owns over 1,500 operationally crucial properties across the industrial, warehouse, retail, office, and other sectors. It's further diversified by geographic region, with holdings in North America and Western Europe.
It primarily leases these properties to high-quality tenants under long-term triple net leases (NNN). These make the tenant responsible for covering maintenance, insurance, and real estate taxes. As a result, it generates very stable rental income.
W.P. Carey pays out a meaningful portion of its income -- about 80% of itsfunds from operations (FFO) in 2022 -- to shareholders via its dividend. That still gives it a nice cushion while allowing it to retain some earnings to fund new investments. The REIT offers a roughly 5% dividend yield at the recent share price. This implies it can turn every $1,000 invested in its stock into about $50 of annual passive income.
It also has a strong investment-grade balance sheet. That further enhances its financial flexibility, allowing it to make acquisitions while growing the dividend.
This combination of features makes W.P. Carey among the lowest-risk REITs. Because of that, it's a very low-stress investment.
A steady grower
The company has an excellent track record of growing its dividend:
Image source: W. P. Carey.
This upward trend should continue in the future, enabling the REIT to steadily supply more passive income to investors.
Rent increases provide the company with a solid base of growth. Nearly all its leases allow it to increase rents each year. More than half of them contain escalation clauses tied to inflation, while a large portion of the remaining leases rise at a fixed rate. With inflation surging over the past year, W.P. Carey's rents are growing at an accelerated rate, which it sees continuing into next year.
The other big growth driver is acquisitions. W.P. Carey's solid financial profile allows it to continue expanding its diversified real estate portfolio. The REIT invested $1.42 billion last year on new property additions. About two-thirds of its deals were for industrial properties and warehouses, sectors where it's seeing the best investment opportunities these days.
Meanwhile, the company entered 2023 with a strong pipeline of acquisition opportunities, including over $500 million of transactions in advanced stages. It has significant liquidity to fund these deals and others that arise throughout the year. Accretive acquisitions and growing rents at existing properties should drive steady growth in FFO per share, allowing W.P. Carey to continue increasing its dividend.
The relaxed way to invest in real estate
W.P. Carey makes it easy to invest in real estate. The REIT enables investors to own a piece of its high-quality real estate portfolio, entitling them to a share of its stable rental income.
And the company's embedded rent growth and ability to make accretive acquisitions should allow it to continue growing its dividend payments. So an investor can sit back and relax while collecting a steadily rising stream of income.
FAQs
Real estate investment trusts (REITs) are usually popular investments for income investors. They purchase a lot of properties, rent them out, and split the rental income with their investors. They also need to pay out at least 90% of their taxable earnings as dividends to maintain a favorable tax rate.
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Why you shouldn't invest in REITs? ›
When investing only in REITs, individuals incur more risk than when they are part of a diversified portfolio. REITs can be sensitive to interest rates and may not be as tax-friendly as other investments.
What is the 90% rule for REITs? ›
By law, REITs must distribute at least 90% of their taxable income to shareholders. This means most dividends investors receive are taxed as ordinary income at their marginal tax rates rather than lower qualified dividend rates. Any profit is subject to capital gains tax when investors sell REIT shares.
What is the negative side of REITs? ›
However, REITs are not risk-free: they may have highly inconsistent, variable returns, are sensitive to interest rate changes are liable to income taxes may not be liquid, and can be dramatically affected by fees.
Does Warren Buffett own any REITs? ›
Buffet and REITs
However, Berkshire sold its holdings of STORE Capital in 2022 after the company announced it was being acquired by two outside investment funds. Since then, filings have shown that Berkshire Hathaway has not owned shares of any other REIT.
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What I wish I knew before investing in REITs? ›
A lot of REIT investors will select their investments based on the dividend yield and think that a higher yield will likely lead to higher total returns. But in reality, it is often the opposite. More often than not, the lowest-yielding REITs have actually outperformed the highest-yielding REITs over the long run.
High interest rates make it more expensive for REITs to invest in new properties. They also tend to mean REITs' yields, a big part of their appeal to investors, are less competitive with other income investments.
Can REITs go broke? ›
REIT bankruptcies have indeed been a rarity since the REIT debacle of the mid-1970s, when high leverage and highly speculative real estate investments resulted in numerous REIT failures.
What is the 80 20 rule for REITs? ›
80-20 Rule: At least 80% of a REIT's asset value must be in completed and income-generating real estate, with the remaining 20% able to be invested in riskier assets such as under construction buildings, equity shares, bonds, cash, or under-construction commercial property.
What is the REIT 10 year rule? ›
For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.
How long should I hold a REIT? ›
In many cases, this can take around 10 years to occur. And with publicly traded REITs that fluctuate with the stock market, Jhangiani recommends holding onto them for at least three years.
Should I invest in a REIT right now? ›
There are three key reasons to invest in listed REITs right now, starting with the fact that REITs have outperformed stocks and bonds when yields and growth move lower. Demand is healthy while supply is constrained, and REIT valuations relative to the broader equity market are meaningfully below the historical median.
Do REITs do well in a recession? ›
REITs Outperform Stocks During Recessions
The stock market is extremely volatile during recessions. Publicly traded stocks rely heavily on the performance of the companies that are being traded in order to succeed. During a recession, those companies struggle, and their stock value drops.
What is the average rate of return on a REIT? ›
Over a 15-year period, according to Cohen & Steers, actively managed REIT investors realized an annualized 10.6% return. Of the other active strategies, opportunistic real estate funds placed second, at 9.8%. Core and value-added funds had average annualized returns of 6.5% and 5.6%, respectively, over 15 years.
Do billionaires invest in REITs? ›
Summary. Blackstone has been on a REIT buying spree. Its leaders are self-made billionaires, and they talk highly about REITs.
