OOne of the most memorable quotes on dividend investing comes from Raymond DeVoe Jr., who wrote a long-standing financial newsletter known as The DeVoe Report. Because returns that are significantly higher than the broad market usually involve much higher risk, DeVoe argued that “more money was wasted on achieving return than at the tip of a gun.” .
Investment legend Warren Buffett agreed with DeVoe’s sentiment and said so in his 2011 letter to shareholders. He used the commentary to explain why Berkshire Hathaway prefers to hold its cash in US Treasuries rather than other short-term securities.
The hunt for high-yielding stocks, in particular, more often than not results in not only a possible drop or suspension of dividends, but also significant capital losses for investors when a drop causes the stock price to fall.
However, there are exceptions. Real estate income (NYSE: O) and Properties of Vici (NYSE: VICI) are two real estate investment trusts that do a great job ignoring the yield-hunting truism through proven business models and sustainable payout ratios. Let’s find out a little more about these two actions.
Image source: Getty Images.
1. Real estate income
Real estate income is a S&P 500 a stock that income investors will love (especially because it pays its dividend monthly rather than quarterly). It has acquired the reputation of constantly increasing its dividend. In fact, he’s been doing this for 26 straight years now, which qualifies him as a member of a world-class equity group known as the Dividend Aristocrats.
But past performance isn’t everything, especially in action. Why do I think Realty Income may continue to make payments well into the future? To answer this question, let’s dive into the business model of Realty Income.
Realty Income is a nearly $ 27 billion triple net leasehold REIT (by market cap). This means Realty Income buys single tenant properties from businesses and then rents them out to tenants who cover property taxes, maintenance expenses, insurance costs, and utilities, in addition to reducing a check. monthly base rent to Realty Income. Since the tenant covers most of the expenses associated with the properties, most of the base rent Realty Income receives each month is available either to reinvest in acquiring more properties or to be paid to shareholders via dividends. .
Even with 84.1% of Realty Income’s annualized base rent coming from struggling retail tenants, these particular tenants appear much better equipped to defy concerns about a “retail apocalypse.” Tenants of Realty Income are typically grocery stores, dollar stores, and gas stations / convenience stores. These goods and services are generally in demand regardless of economic conditions and are more competitive with e-commerce than typical retail businesses.
Realty Income’s resilient retail tenants have helped the company steadily increase its adjusted operating funds per share for 24 of the past 25 years (the only year Realty Income’s AFFOs per share declined was in a period of recession in 2009).
Despite arguably the most difficult operating environment for more than a decade and the temporary closure of some tenants at the height of the COVID-19 pandemic last year, Realty Income’s AFFOs per share have everything to do with it. even managed to grow 2.1% year-over-year, from $ 3.32 in 2019 to $ 3.39. in 2020.
With vaccination rates gradually increasing and effective treatments for COVID-19, Realty Income expects its growth to accelerate this year. Realty Income’s most recent forecast of $ 3.53 to $ 3.59 in AFFO per share represents growth of 4.1% to 5.9% from the previous year.
Based on the dividends of $ 2.82 per Realty Income share that will be paid this year, Realty Income’s dividend payout ratio will be between 70% and 70%. Considering how Realty Income’s per share AFFOs have held up in the past, this is a good buffer and suggests that Realty Income’s 4.1% yield is quite safe going forward. . The financial structure of REITs means that their dividends are still fairly secure with payout ratios of around 70%.
And at 19 times the AFFOs per share this year, the Realty Income share is attractively priced given its quality. Overall, Realty Income is a monthly dividend worth adding to an income portfolio.
Image source: Getty Images.
2. Properties of Vici
Similar to Realty Income, Vici Properties is a triple net leasehold REIT. Vici Properties is also roughly the same size as Realty Income, albeit with a lower market cap of $ 18 billion.
Unlike Realty Income, which owned 6,761 properties in the United States, Puerto Rico and the United Kingdom in the second quarter of 2021, Vici Properties has significantly fewer properties in total, but each is much larger. Vici Properties currently owns over 48 million square feet of real estate in 28 experiential properties (i.e. casinos, hotels and golf courses) in 17 markets across the United States. These properties include the famous Caesars Palace, as well as Harrah’s Las Vegas.
There are several things about Vici Properties that stand out as particularly impressive.
In addition to tenants covering all expenses incurred by Vici Properties’ real estate portfolio and monthly base rent checks, Vici Properties enjoys an industry leading Weighted Average Lease Term (WALT), and is not even close. Vici Properties’ WALT is 34.2 years, which means that by adjusting the length of the leases based on their annualized base rent, the average length of the leases is over three decades. The next triple net lease REIT is Essential Properties Real Estate Trust with a WALT of 14.3. Needless to say, this gives Vici Properties enormous revenue stability.
And if that wasn’t enough, Vici Properties has a flawless 100% occupancy rate.
Vici Properties also benefits from financially strong tenants such as Caesars Entertainment and Penn National Gaming. This allowed Vici Properties to literally collect 100% of its rent last year despite the closure of Las Vegas casinos (where over 40% of Vici Properties’ rent comes from) for almost three months due to COVID. -19.
As a result of these remarkable strengths, AFFOs per share of Vici Properties jumped 10.8%, from $ 1.48 in 2019 to $ 1.64 in 2020. This is at a time when many REITs have seen their AFFOs barely increase or even slightly decrease, which is testament to the business models of Vici Properties and its tenants.
As the economy continues to recover from the pandemic and Vici Properties continues to expand its holdings, management said it believes AFFO per share growth will increase even further in 2021. Vici Properties’ recent forecast $ 1.82 to $ 1.87 in AFFO per share for this year would equate to a staggering 11% to 14% year-over-year growth rate from 2020.
These promising growth prospects explain why Vici Properties increased its dividend by 9.1% last month, along with the announcement of the acquisition. MGM Growth Properties (NYSE: MGP) in a $ 17.2 billion deal. With an AFFO payout ratio falling in the low to mid range of 70% this year, investors can rest assured that Vici Properties’ 4.8% dividend yield is not a high yield mirage.
And at a price / AFFO multiple of around 16 for this year, Vici Properties is offering investors a well-hedged return of almost 5% with strong growth potential at a reasonable share price.
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Kody Kester owns shares of Realty Income and VICI Properties Inc. The Motley Fool owns shares and recommends Berkshire Hathaway (B shares). The Motley Fool recommends MGM Growth Properties (Class A) and recommends the following options: long January 2023 calls of $ 200 on Berkshire Hathaway (B shares), short January 2023 $ 200 put on Berkshire Hathaway (B shares) and short January 2023 calls of $ 265 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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