American Made: Why NNN REIT Might Be a Better Choice Than Realty Income

Realty Income (NYSE: O) is a great option for dividend investors who want a diversified net lease real estate investment trust (REIT). However, there are drawbacks to consider when looking at this slow and steady tortoise.

Some investors might prefer its smaller peer NNN REIT (NYSE: NNN), which is focused on investing in retail properties located in America. Here's why NNN REIT might be a better, American-made choice than Realty Income for some dividend investors.

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What does NNN REIT do?

NNN REIT was once called National Retail Properties, which is an accurate description of what the company does. Its portfolio of more than 3,500 properties is located entirely within U.S. borders. It has more than 375 tenants that span across 37 different lines of trade within the retail sector.

Net lease retail assets tend to be very similar to each other, allowing for easy acquisitions, sales, and re-leasing, if necessary.

Image source: Getty Images.

Net lease properties are integral to the story for NNN REIT. A net lease requires the tenant to pay for most property-level expenses. That gives the lessee effective control of the asset and reduces risk for the landlord.

Acquisitions, however, usually come in the form of sale-leaseback transactions. In essence, the seller wants to raise cash but doesn't want to give up operational control of the property it's selling. A deal with NNN REIT can make that happen.

This brings up the most important aspect to consider about NNN REIT: Roughly 72% of its transaction volume since 2007 has come from companies with which it has an existing relationship.

Given the intimate knowledge NNN REIT has on the performance of the retailers it works with, it can make well-informed investment decisions with these properties, and it's helping to finance the growth its tenants are experiencing. So NNN REIT is growing along with its tenants.

How does NNN REIT beat Realty Income?

Realty Income, meanwhile, is one of the largest REITs you can buy, has a globally diversified portfolio, invests in industrial assets in addition to retail properties, and has a gargantuan 15,600 buildings in its portfolio. There's really nothing wrong with any of that, but Realty Income is so large at this point that it has to make massive investments to move the needle on the top and bottom lines.

NNN REIT's smaller size makes it easier to grow, and its tight lessee relationships give the company a pipeline for that growth. It's differentiated from Realty Income in this way, and that could make it a better option for a lot of investors.

Also, being focused on its all-American property portfolio is actually a key piece of the puzzle, since it helps maintain management's focus. Realty Income is increasingly having to be a jack of all trades as it expands into diverse businesses like casinos, data centers, and even lending. NNN REIT just has to be good at one thing.

However, the most compelling statistic here will likely be the dividend. NNN REIT has increased its dividend annually for 35 consecutive years, which is five more years than Realty Income. Both clearly have attractive business models, but if you prefer to stick with U.S. companies, buying NNN REIT is in no way stepping down in quality. It could even be argued that it's a step up.

Paying up for quality

Realty Income currently has a 5.7% dividend yield, while NNN REIT's yield is 5.5%. The slight premium that's afforded to NNN REIT isn't uncommon between these two net-lease REIT bellwethers. That said, given NNN REIT's strong relationship model and strict U.S. retail focus, it's probably worth a premium for investors who want to buy well-positioned all-American dividend stocks.

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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 has a disclosure policy.