70% of This High-Yield Dividend Stock's Income Comes From Just 2 Companies. Here's Why I'm Not Worried.

VICI Properties (NYSE: VICI) currently owns 103 properties leased to 16 tenants, which underpins its 7%-yielding dividend. However, its top tenant accounts for 38% of its rent, while its next-largest tenant accounts for another 32%. That's 70% of its rent coming from just two tenants.

Despite that tenant concentration, I'm not worried about the real estate investment trust's (REIT) high-yielding dividend. Here's why.

Image source: Getty Images.

Why is this REIT so concentrated at the top?

VICI Properties formed in October 2017 as part of an agreement with Caesars Entertainment and its creditors, under which much of the casino operator's debt converted into ownership of most of the real estate it occupied. At the time, the REIT had 19 properties and a single tenant.

The landlord has significantly expanded and diversified its portfolio since its formation. The biggest single transformational move came in 2021 when it agreed to acquire fellow gaming REIT MGM Growth Properties in a $17.2 billion deal. That REIT formed in 2015 after casino operator MGM Resorts International spun off its real estate assets (15 properties) to create a new REIT. That deal reduced VICI Properties' tenant concentration from 84% Caesers' to 41%, while expanding its portfolio from 28 gaming properties to 43.

The REIT further reduced its tenant concentration and diversified its portfolio beyond gaming in 2023, when it acquired 38 bowling entertainment centers in a $432.9 million sale-leaseback transaction with Bowlero (now Lucky Strike Entertainment). It has added several additional gaming and non-gaming tenants to its roster over the years.

Here's why I'm not concerned about its tenant concentration

VICI Properties doesn't own commodity real estate like convenience stores or warehouses. It owns market-leading gaming, hospitality, entertainment, wellness, and leisure destinations. Its portfolio features some of the most iconic properties on the Las Vegas Strip, including Caesars Palace Las Vegas and MGM Grand. The properties have multiple revenue streams, including hotel rooms, gaming space, meeting and convention space, food and beverage outlets, entertainment venues, and retail outlets. As a result, even if the current tenant ran into financial issues, it could easily lease these properties to a new operating tenant.

Additionally, VICI Properties is steadily diversifying its tenant base and portfolio. During the second quarter, it added Golden Entertainment to its roster (15th tenant) through a $1.2 billion sale-leaseback transaction. It's now the REIT's fifth-largest tenant, accounting for 3% of its rent. It also signed a build-to-suit transaction with Club Med, under which it acquired a beach resort in St. Croix for $20.3 million and leased it back to Club Med (its 16th tenant). VICI Properties also plans to invest $55.2 million to redevelop the property.

It has also invested over $4.2 billion into loans and other securities backed by experiential real estate with industry-leading operators, including Great Wolf Lodge, Canyon Ranch, and Cabot. These investments currently contribute about 8% of its total income, further reducing its overall income concentration. Many of these investments include the option to acquire the underlying real estate in the future, which would further diversify its rent roll and portfolio.

Secured by a strong portfolio

VICI Properties gets 70% of its rent from just two tenants, which is very high. However, they're operating world-class properties with diversified revenue streams to help cover those rental payments. Further, the REIT is steadily diversifying its portfolio by operator and property type. These factors drive my confidence in the safety of its 7%-yielding dividend.

Matt DiLallo has positions in Vici Properties. The Motley Fool recommends Vici Properties. The Motley Fool has a disclosure policy.