If you are looking for something that will throw off large amounts of income over the next decade, the possibility of stuffing your IRA with shares of the real estate investment trust W.P. Carey (WPC) seems like one of the smartest decisions you can make to get some passive income flowing. There is also the psychic reward of knowing those cash dividends would require taxation at ordinary income rates if held in a taxable brokerage account but can build up undisturbed if held in an individual retirement account. Theis ability to elide taxation is a reason why I consider attractive REITs to be an ideal retirement holding–a good chunk of the total return comes from cash dividends, and the gusher really opens up when you let the share count increase for years and years.
Right now, W.P. Carey pays out a $3.96 dividend. The payout goes up about half a penny or so each quarter, and so shareholders of W.P. Carey ought to collect at least $4 in dividends over the course of 2017.
At the current price of $58 per share, I would wager that shareholders ought to collect about 6.9% in dividends on their investment over the course of 2017.
When you see yields like that, you should ask: Is it sustainable? And is there any chance for growth?
My answer to the first question is yes. W.P. Carey generates $5.15 per share in funds from operations. The expected $4 dividend in 2017 is only about 77% of the rental cash flows that are coming in.
Do I think it will grow? Yes, but probably slower than most analysts predict. W.P. Carey seemed to show fast growth between 2012 and 2016 as funds from operations increased from $3.76 per share to $5.15 per share. This was 8.2% annual growth in funds from operations.
I don’t think those figures are repeatable. W.P. Carey acted aggressively during the recession by purchasing distressed low-quality assets at about a 25% discount to what we would consider fair value. The 2012-2016 marked a period of muddy assets regaining their luster, and that is why W.P. Carey shareholders were able to receive above-average growth while collecting an above-average yield.
But now, the REIT management seems to think it is time to de-risk. It has sold almost $500 million in assets this year that are below investment grade, and has added $370 million in assets that are investment grade. This means that W.P. Carey is paying higher valuation multiples to make its acquisitions, and is moving the overall portfolio in the direction of low-growth stable cash flows.
I’m not as bullish on the growth prospects as those calling for 6-8% growth in funds from operations. I expect funds from operations to grow at a rate of 3-5%, with potentially a point being knocked off for transaction costs as it continues to tweak its portfolio of almost 1,000 properties.
Still, this is a good place for prospective REIT investors to be. When you have a sustainable 6.9% starting yield, you really don’t need much to go right in order to generate satisfactory returns. I expect total returns in the range of 10-12% from this point forward, which would be an impressive absolute return but also even more impressive given the higher valuations that currently exist in the REIT sector and the fact that you are receiving such a high current income without “chasing yield” in order to so.
For passive retirement investors that reinvest, the value proposition catches my eye because of how quickly your income can grow by racking up additional shares. With mid single digit growth dividend growth and no reinvestment, you ought to collect $52 per share in REIT dividends through 2026. If you do reinvest, you ought to collect $63 per share that gets reinvested at an average price of $90 or so.
That means I expect each share of W.P. Carey today to produce 0.7 new shares by 2026. If W.P. Carey pays out $5.30 per share in dividends in 2026, that means someone investing $5,500 into W.P. Carey ought to start out with 96 shares producing $384 in annual income that will grow into 163 shares of W.P. Carey trading at a price of around $115 or so for a market value of $18,700 ten years from now. If the 2026 dividend is in the range of $5.30 per share, the 163 shares of W.P. Carey could be producing $863 per year for you.
Even if you don’t reinvest, the 96 share W.P. Carey base ought to generate somewhere around $5,000 in cumulative tax-free real estate dividends for you over the next ten years. If you want to get your hands on a high reliable income stream that can give you a lot of self-generating cash to make new investments, I would perform full due diligence on W.P. Carey as an IRA contender for 2017.
Source Consulted: W.P. Carey Annual Report