Real estate income (NYSE:O) is a stock that dividend investors tend to find very attractive. There are some very good reasons for this too.
But that doesn’t mean it’s the only net lease real estate investment trust (REIT) investors should consider. In fact, the company lags behind its rival in one important aspect of its dividend. Here’s the REIT that outperforms Realty Income.
What is a Net Lease REIT?
Before naming names, it’s important to understand what net-lease REITs do. First of all, they are REITs that own real estate, i.e. purchase physical assets and then rent them out to tenants and thus collect rent. However, net rental properties are typically single tenant, meaning there is only one tenant in each property. This means that every single property in the portfolio represents a high risk, as a tenant moving out would mean an entire building would be empty. A large portfolio of assets offsets this risk.
The next big issue to understand is the structure of net leases. Net rental properties essentially require the tenant to cover most of the operating costs at the property level. This includes things like maintenance and taxes. This reduces the risk for the REIT because, to put it simply, all it has to do is sit back and collect rent. Everything else is the responsibility of the tenant. All in all, net lease REITs are a relatively low-risk income investment with a sufficiently large portfolio.
Realty Income is the 800 pound gorilla
By far the biggest name in the net rental space is Realty Income. Its portfolio includes a massive 15,450 properties and has a market cap of around $46 billion. To put this into perspective, this market cap is more than three times the size of its next largest competitor. Size certainly comes with advantages, as Realty Income’s size typically allows for easier access to capital markets.
Conservative dividend investors would do well to consider Realty Income and its attractive 5.7% dividend yield. However, there is one metric that investors often consider that real estate returns actually fall behind. The company has increased its dividend annually for 29 consecutive years. That’s impressive, though NNN RIDING (NYSE:NNN) has increased its dividend for even longer than 34 years.
To be fair, NNN REIT is a much smaller company with a market cap of around $7.5 billion. The dividend yield is also slightly lower at 5.5%. But from a growth perspective, it will be easier for NNN REIT to expand its business than Realty Income. This is just a simple calculation considering that much more transaction volume is required to build a larger business. Looking at it another way, NNN REIT owns almost 3,500 properties. It simply doesn’t need to purchase as many new assets as Realty Income does to impact sales and the bottom line.
After noting the dividend payout and easier growth path, investors should also be aware of the collaborative nature of NNN REIT’s business. Since 2007, around 72% of acquisitions have come from companies that are already tenants. Essentially, the Company’s tenants know that they can turn to NNN REIT when needed, and NNN REIT is ready and willing to work with them and help both companies grow over time. While NNN doesn’t exactly have built-in growth, it certainly appears to have a solid lead when it comes to finding new properties to purchase.
If you like one, you’ll probably like the other too
Basically, if you’re looking at Realty Income because dividend consistency is important to you, you should probably take a step back and look at NNN REIT as well. However, there is a caveat here: NNN REIT focuses exclusively on the US retail sector, while Realty Income has a much more diversified portfolio. But if you factor the growth factor into the equation, the smaller NNN REIT could still end up being a big stock in your portfolio.
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Reuben Gregg Brewer holds positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
Like real estate income? This Competitor Has an Even Better Dividend Tracking Originally Published by The Motley Fool