Realty Income and Agree Realty are good REITs: are they worth it?

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on Apr 23, 2024
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  • Realty Income is a dividend aristocrat and one of the most popular REITs in the market.
  • Agree Realty is a smaller REIT that is quickly become a favourite among income investors.
  • A quick look at their performance shows that they always lag the broader market.

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Real Estate Investment Trusts (REITs) are highly popular financial assets, especially among income-focused investors. With most REITs, investors can generate substantially higher yields than in other industries. 

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Realty Income (NYSE: O) and Agree Realty (NYSE: ADC) are often seen as royalty by REIT believers. It is highly rare to find any negative report about these REITs, Realty Income in particular. 

A look at Yahoo Finance shows that most Wall Street analysts have a bullish view of Realty Income. They include the likes of Mizuho, Stifel, BMO Capital, and RBC. The average estimate of the stock is $60, which is higher than the current $56.

The same is true about Agree Realty, a smaller REIT with a market cap of about $5.6 billion. Most analysts, including those at Truist, Wells Fargo, and Mizuho have a bullish rating of the stock with an average target of $65.97, which is higher than the current $56.90.

Realty Income and Agree Realty are loved for the quality of their assets and high dividend payouts to investors. Agree has a forward dividend yield of about 5.30% while Realty Income yields about 5.85%. Realty Income has increased dividends for decades, making it a dividend aristocrat.

REITs always underperform the market

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However, the question is whether it makes sense to invest in Realty Income and Agree Realty. To assess that, you should look at the total return instead of the price return. Total return is a figure that looks at the performance of a stock together with the dividends. 

To be clear: past performance is not always a good indicator of future performance. Nonetheless, it can help you assess whether an asset is a good one. As a result, most highly successful investors prefer allocating money to assets that have done well over the years.

A closer look at the performance of Agree Realty, Realty Income, and the iShares Global REIT ETF (REET) shows that their performance have trailed the broader market in most periods. 

In the past five years, the S&P 500 ETF (SPY) has had a total return of over 86%. In the same period, Realty Income has risen by just 1.86% while Agree Realty and the REET ETF have risen by 7.91% and 0.63%, as shown below. 

Realty Income vs ADC vs REET vs SPY

The same trend has happened in the past three years as the SPY has jumped by 26% while the three assets have dropped by over 8%. This year, the SPY ETF has jumped by 5.46% while the three have crashed by over 5.7%.

Therefore, the takeaway of all this is that while REITs provide higher dividend yields, their total returns tend to be weaker than the broader market. As such, investing in a broader ETF like the SPDR S&P 500 fund will often generate higher returns than these companies. 

This performance will likely continue this year now that the Federal Reserve is set to maintain a more hawkish tone than predicted earlier. That’s because the US inflation has remained stubbornly higher than expected.

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