Better Dividend Stock: Sun Communities vs. Agree Realty

Key Points

• Sun Communities owns mobile home parks and RV resorts.

• Agree Realty owns single-tenant retail properties.

• Sun Communities often gets the nod for its growth potential, but Agree may have better all-around prospects.

• 10 stocks we like better than Agree Realty ›

Real estate investment trusts (REITs) are generally income investments, but they all go about the income theme a bit differently. For example, Sun Communities (NYSE: SUI) is often viewed as a growth-oriented REIT, while a REIT like Realty Income (NYSE: O) is all about a sustainable high yield. If you lean more toward Sun Communities, then you might want to examine Realty Income competitor Agree Realty (NYSE: ADC) instead. Here's why.

What do these REITs do?

Sun Communities owns mobile home parks and RV resorts. It is one of the largest players in each of these niches. The expectation is that the increasing number of older people will lead to solid, long-term growth for the REIT's assets. That's likely to be true since mobile home parks are a lower-cost living option than other types of housing. Meanwhile, the RV lifestyle tends to attract loyal adherents. There's no reason to believe that the big picture growth angle here isn't going to pan out as expected.

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Agree Realty is a bit less exciting. It owns single-tenant net-lease retail properties. A net lease requires the tenant to pay for most property-level operating expenses. Retail assets, meanwhile, tend to be fairly generic, making them relatively easy to buy, sell, and find new tenants if needed. The big story with Agree is about growth through acquisitions. With a modest portfolio of about 2,400 properties, it has plenty of room for growth.

Which is the better dividend stock?

To start with the most obvious number, Agree Realty has a 4.2% dividend yield. Sun Communities' yield is just under 3.4%. Clearly, from an income perspective, Agree Realty wins this point. To be fair, Sun Communities' yield is near its highest level in five years, so some investors might see the stock as attractively priced. But it still isn't offering as much income as Agree, which also happens to be trading with a yield that is also near its high end during the past five years.

With regard to dividend consistency, Sun Communities has increased its dividend annually for nine consecutive years. Agree Realty's streak is a bit more complicated. Roughly five years ago it switched from quarterly to monthly payments, so it might look like there was a dividend cut. The dividend has actually been increased every year since 2012, which is more than 10 years. Agree wins again.

Then there's the question of dividend growth. Sun Communities' dividend has increased at an annualized rate of roughly 4% during the past decade. Agree's dividend has grown at a roughly 5% pace over that same span. Another point for Agree. To be fair, Sun Communities' dividend growth has been slightly faster during the past couple of years, but there's a caveat here.

Looking to the future, the opportunity set in the net-lease retail property niche is much larger than the opportunity set in the areas in which Sun Communities competes. Even from a simple level, it is easier to build retail properties than get a new mobile home park approved in most areas. That may make Sun Communities' properties more valuable in some ways, but given that Agree's growth is largely driven through acquisitions, it still wins the point.

Most dividend investors will probably be better off with Agree

Sun Communities is a perfectly fine REIT, and it wouldn't be a bad decision to buy it. However, if you are looking for dividend growth, you might be better off with Agree Realty. It has a higher yield, better history of dividend growth, and a business model that will probably offer a longer runway for robust, long-term growth. And, like Sun Communities, Agree Realty's valuation, using yield as a rough gauge, seems attractive right now.

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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends Sun Communities. The Motley Fool has a disclosure policy.