Exploring Sustainable Income with W.P. Carey and EPR Properties
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Real Estate Investment Trusts and Their Income Potential
Real estate investment trusts (REITs) can be excellent income-producing investments. They tend to offer significantly higher dividend yields, averaging around 4% compared to the sub-1.5% average yield of the S&P 500. The top REITs aim to consistently increase their dividend payments, making them appealing for income investors.
Understanding High-Risk Dividend Opportunities
Annaly Capital Management currently boasts a dividend yield of nearly 13%, which is significantly above the S&P 500 average. However, while mortgage REITs like Annaly can offer higher yields, they also come with increased risks. The key concern is Annaly's declining earnings available for distribution (EAD). Recently, Annaly reported an EAD of $0.68 per share, which is only slightly above its dividend payment. Although it showed some improvement from the previous quarter, it is still well below its figures from a year ago and at the end of 2022.
Due to its declining EAD, Annaly had to cut its dividend in early 2023, raising concerns about the sustainability of its high yield. This consistent trend may deter income-focused investors from placing their bets on this REIT.
A Shift Towards Growth with W.P. Carey
W.P. Carey is a diversified REIT focused on operationally critical properties that are net leased to high-quality tenants. With a portfolio that includes nearly 1,300 single-tenant industrial, warehouse, and retail properties across North America and Europe, W.P. Carey has a strong foundation. The REIT also manages 89 self-storage operating properties, providing a steady income stream through various rental agreements with built-in escalation clauses tied to inflation or fixed rates.
Having previously established a solid dividend growth track record, W.P. Carey made a strategic decision to exit the office sector, which led to a reset in its dividend to align with its new income levels. Since this shift last year, W.P. Carey has been actively rebuilding its portfolio, focusing on sectors with better long-term fundamentals, particularly industrial real estate. The company plans to invest between $1.25 billion and $1.75 billion in new properties, with a substantial portion already secured, positioning the REIT for significant cash flow growth in the latter half of the year.
EPR Properties: A Specialty REIT with Growth Potential
EPR Properties specializes in experiential real estate, focusing on theaters, attractions, fitness facilities, and educational properties. This unique approach allows EPR to net lease its properties back to operators, creating a steady income source to sustain a dividend yield of over 7%. Like W.P. Carey, EPR Properties had to adjust its dividend in recent years, but this repositioning has enabled the REIT to retain more cash for investments. EPR anticipates investing significant capital annually, funded through retained cash flow and property sales.
EPR’s expanding portfolio has already facilitated recent dividend increases, indicating a positive trajectory for its ongoing cash flow and future dividends.
Choosing Between High Yields and Sustainable Income
While Annaly Capital Management may attract attention with its extraordinary dividend yield, the sustainability of that payout is questionable. Income-focused investors are better served by opting for REITs like W.P. Carey and EPR Properties, which, although offering lower yields than Annaly, promise stability and ongoing dividend growth. These two REITs are positioned well for those looking for consistent and rising passive income streams.
Frequently Asked Questions
What factors should I consider when investing in a REIT?
When investing in a REIT, consider factors such as its dividend yield, earnings available for distribution, portfolio diversity, and historical performance in sustaining and increasing dividends.
Why are W.P. Carey and EPR Properties recommended over Annaly Capital Management?
W.P. Carey and EPR Properties are recommended due to their stable income streams, potential for dividend growth, and focus on diversified and operationally critical properties compared to the high-risk profile of Annaly Capital Management.
How does EAD impact a REIT's dividend sustainability?
Earnings available for distribution (EAD) directly impacts a REIT's ability to pay dividends. If EAD declines, a REIT may struggle to maintain its dividend, as seen with Annaly Capital Management.
What sectors do W.P. Carey and EPR Properties focus on?
W.P. Carey focuses on industrial, warehouse, and retail properties, while EPR Properties specializes in experiential real estate such as theaters, attractions, and fitness facilities.
Can I expect steady dividend growth from industrial REITs?
Yes, industrial REITs like W.P. Carey typically feature built-in rental escalation clauses that can lead to steady and sustainable dividend growth over time.
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