W.P. Carey (NYSE: WPC) currently sits more than 15% below its 52-week high. The weakness in its share price is a big reason the real estate investment trust (REIT) offers a dividend yield above 6%. That's multiples higher than the S&P 500's dividend yield, which currently sits near a 20-year low at 1.2%.
The diversified REIT's high-yielding dividend should steadily rise in the future. That makes it an excellent stock to buy and hold for dividend income in the decades ahead.
Rebuilding the foundation
W.P. Carey has undergone some major changes over the past year. The company made the strategic decision to exit the office sector late last year. It subsequently sold or spun off its entire office portfolio. In addition, one of its former top tenants exercised its option to acquire a portfolio of self-storage properties it had leased from the REIT.
As a result of that lost income and a desire for a more conservative dividend payout ratio, W.P. Carey reset its dividend last year. That ended a quarter-century of dividend growth.
W.P. Carey now has a much stronger foundation. Asset sales have strengthened its balance sheet. It ended the third quarter with a 5.4 leverage ratio, below its conservative leverage target in the mid-to-high 5s. It also has a lower dividend payout ratio, allowing it to retain more cash to fund new investments. As a result, it has a much more conservative financial profile and significant flexibility, leaving its high-yielding dividend is on a much firmer foundation.
Building back better
The REIT has started to rebuild its portfolio by acquiring properties with better long-term fundamentals than the office sector, like industrial real estate. The company had invested $971.4 million into new properties through the end of October. For example, it purchased a 19-property portfolio of industrial and warehouse properties in the U.S. and Canada for $191 million. The portfolio has an average remaining lease term of 13 years, with leases escalating at either a fixed rate, in Canada, or one tied to inflation, in the United States. W.P. Carey also completed a $52 million five-property sale-leaseback transaction of industrial and warehouse properties in Italy and Canada. The leases featured a 25-year term that escalates rents at a fixed rate, in Canada, or an inflation-linked rate, in Italy.
W.P. Carey currently owns over 1,400 properties net leased to high-quality tenants with a weighted average lease term of 12.2 years. Nearly two-thirds of its portfolio are industrial or warehouse properties, with 22% retail and 15% other properties. Meanwhile, 53% of its leases link rents to inflation, while another 43% raise them at a fixed rate. As a result, the REIT's existing portfolio should produce steadily rising rental income, as rents grew at a 2.8% annualized rate in the third quarter.
The company plans to continue acquiring properties secured by long-term net leases with built-in rent growth. Its near-term deal pipeline contained $500 million of potential new investments, putting the company on track to reach or exceed its $1.5 billion investment volume target for 2024. Meanwhile, the company has ample funding sources, including additional non-core properties it could sell, to continue making accretive new investments in 2025 and beyond. That should enable the REIT to grow its adjusted funds from operations (FFO) at a healthy rate in the future.
W.P. Carey's growing FFO should support a steadily rising dividend. The REIT has already raised its payment three times since the reset late last year.
A rock-solid and steadily rising dividend
With shares of W.P. Carey currently sitting 15% below their 52-week high, investors can lock in a higher dividend yield right now. That payout is on a very solid foundation and should grow in the future as the REIT expands its high-quality real estate portfolio. That makes it an excellent stock to buy for decades of passive income.
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Matt DiLallo has positions in W.P. Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
