Realty Income(NYSE: O) is a stock that dividend investors tend to find very attractive. There are some very good reasons for that, too.
But that doesn't mean it is the only net lease real estate investment trust (REIT) that investors should be looking at. In fact, it trails behind this one peer when it comes to one important aspect of dividend. Here's the REIT that out-distances Realty Income.
What is a net lease REIT?
Before naming names, it is important to understand what net lease REITs do. For starters, they are property owning REITs, so they buy physical assets and then lease them out to tenants, collecting rent. But net lease properties are usually single tenant assets, so there is only one lessee in each property. That means that any single property in the portfolio is high risk since a tenant departure would mean an entire building is sitting empty. Having a large portfolio of assets offsets this risk.
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The next big issue to understand is the structure of net leases. Essentially, net lease properties require the tenant to pay for most property level operating costs. This includes things like maintenance and taxes. That reduces risk for the REIT, since it, to vastly simplify things, only has to sit back and collect rent. Everything else is on the tenant to take care of. All in, with a large enough portfolio, net lease REITs are a fairly low risk income investment.
Realty Income is the 800 pound gorilla
By far the biggest name in the net lease space is Realty Income. Its portfolio contains a massive 15,450 properties and it has a market cap of roughly $46 billion. For reference, that market cap figure is more than three times the size of the next largest competitor. Size comes with advantages, for sure, given that Realty Income's scale will usually provide it with easier access to capital markets.
Conservative dividend investors would do well to consider Realty Income and its attractive 5.7% dividend yield. However, there's a metric that investors often consider where Realty Income actually falls behind. It has increased its dividend annually for 29 consecutive years. That's impressive, but NNN REIT(NYSE: NNN) has hiked its dividend for an even longer 34 years.
To be fair, NNN REIT is a much smaller company, with a market cap of around $7.5 billion. The dividend yield, for reference, is a bit lower, too, at 5.5%. But from a growth perspective, it is going to be easier for NNN REIT to expand its business than it will be for Realty Income. That's just simple math, given that it takes a lot more transaction volume to grow a bigger business. Looking at that a different way, NNN REIT owns just about 3,500 properties. It just doesn't need to buy as many new assets as Realty Income to impact the top and bottom lines.
After taking note of the dividend streak and the easier path for growth, investors should also be aware of the partnership nature of NNN REIT's business. Since 2007, roughly 72% of its acquisitions have come from companies that it already counts as tenants. Essentially, the company's lessees know that, if they need to, they can go to NNN REIT and it will be ready and willing to work with them, helping both entities to grow over time. While not exactly built-in growth, NNN certainly appears to have a solid head start when it comes to finding new properties to buy.
If you like one, you'll probably like the other
Basically, if you are looking at Realty Income because dividend consistency is important to you, then you'll probably want to step back and also look at NNN REIT. That said, there's one caveat here, NNN REIT is solely focused on the U.S. retail sector whereas Realty Income has a far more diversified portfolio. But, when you take into account the growth piece of the equation, smaller NNN REIT might still end up being a big stock in your portfolio.
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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
