Realty Income Is Great, but This REIT's Earnings Could Grow 3x Faster in 2025

Realty Income (NYSE: O) is a well-run net lease real estate investment trust (REIT). It's the industry's 800-pound gorilla, with an enormous portfolio and a reach that spans North America to Europe. Here's a look at why dividend investors like Realty Income and why there's another net lease REIT that may be a better choice today.

What does Realty Income do?

Realty Income owns single-occupant properties where the tenant is responsible for most property-level expenses. Although any single property is high risk because there's only one tenant, the REIT owns more than 15,600 properties, so total default risk is quite low. The net leases it uses reduce operating risk because most property operating costs are paid by the tenant.

Image source: Getty Images.

This huge property portfolio is also notable for its breadth. It's spread across North America and Europe and includes both retail and industrial assets, along with some one-off properties like casinos, data centers, and vineyards. Realty Income has a lot of levers to pull as it seeks to grow. Add in a 5.8% dividend yield, and you can see why dividend investors would be attracted to Realty Income.

However, there's one problem: Realty Income is a huge company and growth is likely to be slow. For example, in 2025, the company is calling for adjusted funds from operations (FFO) growth that could be as low as 0.7%. Even at the high end of its estimate, growth will be modest at just 2.2%.

You can do better on the growth front with W.P. Carey (NYSE: WPC), the second largest net lease REIT.

It's harder for a large company to grow

This isn't meant as a knock against Realty Income. The company has achieved a great deal and is a reliable dividend stock with its hefty yield. But it gets harder for a company to grow as it increases in scale.

That's just the basic math of the situation. Peer W.P. Carey's market cap is roughly a quarter of the size of Realty Income's. But it offers a 6.2% dividend yield.

That said, it's every bit as diversified as Realty Income, owning industrial and retail assets in both North America and Europe. In fact, W.P. Carey was investing in Europe for decades before Realty Income crossed the pond.

The problem with W.P. Carey is that it cut its dividend in 2024 after deciding to exit the struggling office sector, so its dividend track record doesn't look nearly as good as Realty Income's. However, after the cut, W.P. Carey started increasing the dividend quarterly again, just like it had been doing before the reduction. In other words, the business overhaul, while difficult on dividend investors, was made from a position of strength, not weakness.

There will be a benefit in 2025, however, because the office exit left W.P. Carey with cash to invest in new assets. The financial benefit of the REIT's new investments will start to show up this year. Right now management is calling for adjusted FFO (a key measure of a REITs health) growth of roughly 2.5% to 4.5%. At the low end, that's three times faster than the growth Realty Income is expecting.

W.P. Carey is a competitor with a similar business, higher dividend yield, and more near-term growth potential than Realty Income. For many investors, that will be a more attractive investment choice.

Both REITs are good options

To be fair, W.P. Carey did let dividend investors down when it trimmed the dividend. If dividend consistency is important to you, Realty Income probably is the more attractive choice.

However, if you can see that W.P. Carey's dividend cut has left it in a better position for the future, it offers a number of attractive benefits that are on par with or better than what's on offer from Realty Income. Notably, growth is one of the big ones.

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Reuben Gregg Brewer has positions in Realty Income and W.P. Carey. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.