The company is rebuilding its reputation among investors after cutting its dividend in late 2023.
Real estate is one of the oldest ways to invest money and remains extremely popular today. Many people also love the idea of dividends, cash profits that companies give their shareholders to share their success. Most individuals lack the funds or know-how to buy and manage properties. That makes real estate investment trusts (REITs) such a great choice.
These companies buy and lease properties, and pay out most of their income to shareholders. W.P. Carey (WPC 0.74%) has been around for decades but slumped after cutting its dividend in late 2023. Some investors find a dividend cut unforgivable. But has the time come to reconsider this well-known REIT?
A much-needed pivot
Companies, especially well-known dividend payers, don’t like cutting their payout. You can see that W.P. Carey’s dividend cut ended a long history of steady increases. Ruining that history probably wasn’t easy. Yet, sometimes, the right choices can be the hardest to make.
WPC Dividend data by YCharts
So, what happened? W.P. Carey owned office buildings that became riskier throughout the pandemic as people worked more from home. In mid-2023, office buildings represented about 16% of W.P. Carey’s annual base rate (total annual rent). Management decided to spin off most of its office properties as a new REIT (Net Lease Office Properties) and sell the rest.
This shrunk W.P. Carey’s business, so management had to reduce the dividend to keep the company’s financials in line. The moral of this story? It wasn’t that W.P. Carey’s business was in trouble. Its occupancy rate hasn’t dipped below 97% since 2010. It was a strategic move intended to make W.P. Carey a better company (and investment) in the future.
Back to safety and dividend growth
I will stay on the dividend because most investors buy REITs for the dividend income. Take W.P. Carey, for example. The stock’s price has appreciated just 158% since 1998, but if you include dividends, W.P. Carey’s total investment return balloons to 1,500%. That’s more than the S&P 500 index’s 918%!
No, W.P. Carey and most other REITs won’t give you much growth or excite you with massive rallies. But the dividends add up over time — especially if you reinvest them.
The good news is that the dividend is well-funded today. The company’s 2024 funds from operations will be approximately $4.70 per share, a 74% payout ratio, right where management wants it. For your money, the stock offers a whopping 6.2% dividend yield at the current share price.
The company’s annualized base rate (rental income) grows at a low-single-digit pace, so investors primarily buy the stock for the immediate yield. Remember that dividends from W.P. Carey (and most REITs) get taxed as ordinary income, so consult a tax professional to determine how that may impact your finances.
Is the stock a buy?
Whenever a stock’s appeal is limited to its dividend, buying it at a reasonable price is essential. So, while W.P. Carey’s business is solid and the dividend intact, the price matters a lot.
W.P. Carey trades near the low end of its 52-week range and well off its all-time high. That could be partly due to the stigma of cutting its dividend, but high Treasury yields could be another factor. Treasuries are a safer alternative to stocks, so they can appeal to many investors when their yields are competitive. Higher yields also make debt more expensive, potentially stunting businesses that borrow. REITs fall into this bucket, too.
Historically speaking, W.P. Carey’s dividend yield is about average today:
WPC Dividend Yield data by YCharts
That means income-focused investors can reasonably buy W.P. Carey. Still, the stock has a potential downside if Treasuries continue pressuring high-yield stocks or something happens to the economy (like a recession). In these cases, it can be wise to buy slowly over time, using any potential volatility to your advantage.
Ultimately, W.P. Carey is an excellent source of investment income you can count on today and moving forward.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
