Best Stock to Buy Right Now: Realty Income vs. Agree Realty

The S&P 500 (SNPINDEX: ^GSPC) is offering a tiny 1.3% yield today. The average real estate investment trust (REIT) has a yield of around 4.1%.

That's the backdrop for investors considering between net lease REIT Agree Realty (NYSE: ADC) and its average 4.1% yield, and Realty Income (NYSE: O) and its above-average 5.8% yield. But there's more than yield to examine in this matchup.

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What do Agree Realty and Realty Income do?

At the core of the business models followed by Agree Realty and Realty Income are net lease properties. Generally speaking, these assets are occupied by a single tenant, who is responsible for most property-level operating costs. This gives the tenant effective control over the asset they occupy, and reduces the risk for the landlord, since the property owner doesn't have to deal with the costs and effort of maintaining the asset.

Although any single property is high risk, because there's just one tenant, over a large-enough portfolio, that risk is well mitigated.

Realty Income is the largest net lease REIT with more than 15,600 properties. Agree Realty is a smaller REIT, but still has a significant portfolio with roughly 2,400 properties. But size isn't the only difference between these two portfolios.

Agree is focused on owning retail assets in the United States. Realty Income's portfolio is roughly 75% retail, with industrial and "other" assets rounding the portfolio out to 100%. In the "other" category are things like vineyards, casinos, and data centers. It has a far more diversified portfolio, noting that it also has investments in several European countries.

Given how much larger Realty Income is than Agree, it simply takes more transaction volume to move the needle on the top and bottom lines. The REIT's diversification helps ensure that it has more levers to pull when it comes to making new investments.

From a business fundamentals perspective, Agree is small and focused on growing its core, while Realty Income is larger and more diversified. That has translated into very different valuations, which is, perhaps, appropriate.

Dividend yield or dividend growth?

As noted, Agree Realty's dividend yield is 4.1% or so, right in line with the REIT industry average. Given the higher 5.8% yield on offer from Realty Income, it is pretty clear that investors are affording Agree Realty a premium price.

It is worth highlighting that Realty Income, given its large size, is considered a bellwether in the net lease space. If you are looking to maximize the income your portfolio generates, then Realty Income will be the obvious choice here.

However, that comes at a cost. That cost is growth. Agree Realty is projecting adjusted funds from operations (FFO) growth of 3.6% at the midpoint of its 2025 guidance. At the high point of Realty Income's guidance, it will only grow adjusted FFO by 2.1% or so. If you prefer to own a REIT that's growing more quickly, the better choice is Agree Realty.

There's a secondary impact on the growth front. Realty Income's dividend has increased around 4.3% a year, on average, over the past 30 years. That's not bad, but if adjusted FFO is only expected to grow by 2% or so, investors should expect notably lower dividend increases over the near term.

Agree Realty, on the other hand, has a bit more room to increase its dividend. And on that front, it has increased its dividend by around 5.5% a year, on average, over the past decade. Again, the near-term increases might fall below that figure, but they are still likely to be above the dividend growth on offer from Realty Income. So if you lean toward faster-growing dividends, Agree will win.

What are you trying to achieve?

At the end of the day, both Realty Income and Agree Realty are well run, financially strong net lease REITs. Dividend investors probably wouldn't be making a mistake with either one. However, they aren't interchangeable.

If you are looking for yield and/or diversification, then Realty Income is the likely winner here. If you prefer faster-growing businesses and dividends, you'll probably prefer Agree Realty.

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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.