Real estate investment trust VICI Properties(NYSE: VICI) offers a 5% dividend yield. Realty Income(NYSE: O) offers the same yield. Both use similar approaches to their investments, but one has a longer history and a more diversified business. Erring on the side of caution is probably a good call for investors looking for steady dividend payments.
In a normal lease, a landlord collects rent for a space and handles all of the operating costs of the building. This includes things like maintenance and taxes. In a net lease, the tenant -- usually just one business -- covers those expenses. Spread over a large portfolio, it's a fairly low-risk way to operate in the real estate investment trust (REIT) sector.
Sure, any single property is a high risk because there's only one tenant. But that risk is mitigated with each new property added to the portfolio. Realty Income, for example, has roughly 12,000 properties. No single tenant accounts for more than 5% of its rent roll. In other words, one property going vacant or one tenant going bankrupt wouldn't be a game changer for Realty Income.
Adding to the safety profile, roughly 80% of its rents are from retail assets. There's a variety of property types in that mix, but they are all generally generic assets and easy to sell or release. So even when there is a vacancy, it can be filled fairly quickly. On top of that, management is working to expand its reach in Europe, a relatively new market for the REIT. So it is increasingly geographically diversified as well.
Here's where things get interesting. Realty Income is huge compared to most of its peers, sporting a market cap of more than $40 billion. It can make investments that smaller peers couldn't even consider. One such investment was the recent purchase of a casino in Boston from Wynn Resorts for $1.7 billion. This is a market that has long been dominated by names like VICI Properties.
The problems with VICI
Just because Realty Income bought one casino does not mean it is a casino REIT, or make it at all similar to VICI. However, given its broader business, that may actually make it better than VICI, particularly given the very similar yields.
For example, VICI only owns casinos. This is a highly specialized sector that faces strict regulation with only a relatively small number of operators. Some numbers will help highlight the differences: VICI Properties owns 50 casinos leased out to just 11 tenants. The REIT's largest tenant accounts for 40% of its rent, with the second largest coming in at 32%. Combined, that's nearly three-quarters of the company's rent roll! Meanwhile, one market (Las Vegas) accounts for 46% of rents.
Meanwhile, casino properties aren't interchangeable assets. They are often uniquely designed to create a reason for consumers to visit them instead of their peers. Bringing in a new operator might not be as easy as one might hope. The casino industry is also economically sensitive, since gambling often slows during recessions. While it is true that VICI weathered the 2020 coronavirus pandemic in relative stride, actually increasing its dividend that year despite casinos getting shut down as non-essential businesses, you would be hard pressed to suggest it is a diversified REIT.
VICI Properties' dividend has been growing more quickly than Realty Income's dividend. So a dividend growth investor might give it the edge based on that factor. However, Realty Income has been increasing its dividend at a slow and steady pace for a little over a quarter of a century (the average increase has been 4.4% since 1995). That consistency, coupled with the more diversified business model, should entice investors that are relying on their dividends to pay for living expenses in retirement.
A risk/reward trade-off
At the end of the day, there's nothing inherently wrong with VICI Properties. In fact, it has proven to be a well managed casino REIT. The problem is that it is a casino REIT, which limits its markets and leaves it with a highly focused portfolio. For conservative investors, Realty Income, which has the wherewithal to buy casinos if it wants to, is likely to be a better balance of dividends and diversification.
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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool recommends Realty Income and Vici Properties. The Motley Fool has a disclosure policy.