When the biggest REIT, W.P. Carey (WPC), announced it would hike dividends, investors bought more shares. Shortly afterward, it said it would separate its office real estate assets to NLOP (NLOP). WPC stock fell, then recovered in the last month.
On Dec. 7, WPC finally revealed its revised dividend rate, down 19.7% to 86 cents a share. The forward yield of 5.38% adds risks for investors. It is bad news for REITs because returns are barely above that of risk-free money market funds and Treasury bonds.
WPC is embarking on managing property assets without office space. The payout ratio is also lower, decreasing the attractiveness of REIT investing.
The firm telegraphed the dividend cut for a while, giving markets a chance to digest the severe change. Fortunately, the lower dividend enables WP Carey to strengthen its balance sheet and invest in assets with better returns. In the long term, the growth potential improves in the coming years.
In the short term, income investors are likely to dump the stock. WPC broke investor trust. Those who bought the stock for a steady income will buy other firms. If the stock falls further, value investors may initiate a starter position at better prices and yield.
