Where Will Ultra High-Yield W.P. Carey Be in 3 Years?

Dividend investors were shocked when W.P. Carey (NYSE: WPC) announced that it would be cutting its dividend in late 2023. The decision came after 24 consecutive years of dividend increases and was tied to its rip-the-bandage-off move to exit the office sector.

At this point, Wall Street may be too downbeat on W.P. Carey's future, considering that it trades with a well-above-average dividend yield. Let's take a closer look at W.P. Carey's prospects over the next three years.

The yield is the key factor with W.P. Carey

Investors willing to buy W.P. Carey today can collect a fat 6.1% yield from the net lease real estate investment trust (REIT). (Net leases require tenants to pay for most property-level operating costs.)

To put that yield into perspective, the S&P 500 index offers a yield of just 1.2%. The average REIT, using the Vanguard Real Estate Index ETF as a proxy, has a yield of 3.9%. Clearly, on an absolute basis, W.P. Carey's lofty yield should be pretty attractive to income seekers.

Image source: Getty Images.

The problem is that the REIT cut its dividend. That, understandably, has more-conservative dividend investors worried, especially with the somewhat out-of-the-blue announcement of the cut.

But given the move to exit the office sector, which made up 16% of the rent roll prior to the decision, there really wasn't much choice but to reset the dividend lower. And a "reset" is probably the better way to characterize the change.

Why? Because the very quarter after the reset, the dividend was increased again. And it has been increased each quarter since. That's the same quarterly increase cadence prior to the reduction.

This was not a desperate decision made from a position of weakness. It was a strategic move meant to strengthen the business for the future, noting that office properties are in a deep funk right now.

WPC data by YCharts.

It takes time to invest for the future

The problem for W.P. Carey right now is that the office exit had an immediate impact on its ability to generate rental revenue. To be more specific, it sold and spun off so much property that the rent roll fell dramatically.

That said, the divestitures weren't all negative. The REIT was left with cash that it has been investing in new properties. Through the first nine months of 2024, it bought roughly $740 million of new assets. But acquisitions are lumpy: Subsequent to the end of the quarter, it added another $230 million worth of properties to the portfolio.

With another $500 million of potential acquisitions in the pipeline, W.P. Carey believes it will be able to reach around $1.5 billion worth of purchases in 2024. That's good news, though the timing is hard to predict. Some of that could roll over into 2025.

That isn't a huge deal, since it's normal for acquisitions to be lumpy. And the company has $2.6 billion in liquidity available to fund new deals, so closing acquisitions won't be an issue of investment capacity. There's dual effort taking place here, however, because along with the exit from office, W.P. Carey is making a greater push into the retail sector. This property type made up around 22% of rents at the end of the third quarter of 2024.

Historically W.P. Carey had shied away from retail properties because it believed the sector was overdeveloped and, equally important, competition was high for assets. That said, it is one of the largest and most liquid net lease property types and there has been notable consolidation over the last few years. Management now believes it can play a meaningful role in retail, particularly in the U.S. market. W.P. Carey hopes that retail will account for as much as 30% of rents over the next few years. It is important to keep this in perspective, however, because the goal is to target 30% to 40% of annual deal flow in the retail space, so, unlike the office exit, this portfolio shift could take three to five years to complete.

All in, however, after jettisoning 16% of its rent roll, W.P. Carey is going to need some time to build back. With investors still reeling from the dividend reset, they appear to be in a show-me state of mind. It will take a little while to be able to do that, given the nature of property acquisitions. And that is an opportunity for long-term income investors with a contrarian bent.

An attractive yield today

Yes, W.P. Carey let dividend investors down. But the company is not operating from a position of weakness and is, in fact, operating from a position of strength. As it adds new properties over the next two to three years, notably in the retail sector, that will likely become increasingly apparent to investors.

The initial indication of the company's strength is already plain to see, noting the immediate return to dividend growth. If you stomach buying while others are sitting on the sidelines, high-yield W.P. Carey is likely to be a great addition right now. But that probably won't last, as the REIT continues to build back its portfolio via new acquisitions.

Should you invest $1,000 in W.P. Carey right now?

Before you buy stock in W.P. Carey, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and W.P. Carey wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $869,885!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of November 18, 2024

Reuben Gregg Brewer has positions in W.P. Carey. The Motley Fool has positions in and recommends Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.