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In 2022 and 2023, rising interest rates drove up the yields of low-risk fixed income investments like Treasury bills, bonds, and CDs, which made them more appealing than dividend stocks. But as interest rates decline, those fixed income yields are shrinking and driving more investors back toward higher-yielding dividend stocks.
One of those stocks is Agree Realty (NYSE: ADC), which has gained about 14% during the past 12 months but still pays an attractive forward yield of 4.3%. Let's see if it's the right time to buy, sell, or hold this real estate investment trust (REIT).
What does Agree Realty do?
Agree Realty is a retail REIT that buys properties, rents them out to retailers, and splits the rental income with its investors. All REITs are required to distribute at least 90% of their taxable income as dividends to maintain a favorable tax rate.
At of the end of the third quarter of 2024, Agree owned and operated 2,271 properties in 49 states. More than two-thirds of those were investment-grade. The REIT uses triple net leases, which means its tenants need to cover their own property taxes, insurance, and maintenance fees.
Its top tenants in 2023 were Walmart, Tractor Supply, Dollar General, and Best Buy, which together accounted for 19.5% of its annualized rent. Its other major tenants include CVS, TJX Companies, Dollar Tree, and Kroger.
The reasons to buy and hold Agree Realty
The REIT ended its latest quarter with an occupancy rate of 99.6% and a weighted-average lease term of 7.9 years. By comparison, its larger competitor, Realty Income (NYSE: O), ended its latest quarter with an occupancy rate of 98.7%.
Agree's high occupancy rate indicates its focus on large recession-resistant retailers is paying off. It also tells us it can offset the recent store closures at some of its top tenants (like CVS and Dollar Tree) with the growth of stronger retailers like Walmart.
It has also consistently grown its adjusted funds from operations (AFFO) per share even as macro headwinds rattled the broader market. From 2018 to 2023, its AFFO -- a key measure of REIT performance -- had a compound annual growth rate (CAGR) of 7%. During those five years, Realty Income -- which also leases a lot of its properties to Dollar General, Dollar Tree, and Walmart -- only had a CAGR of 5%. Those growth rates indicate these are good evergreen investments for anyone seeking long-term income.
The reasons to sell or avoid Agree Realty
Agree's fundamentals look sound, but it's still a lot smaller and less diversified than Realty Income, which owns 15,450 properties in the U.S. and abroad. Agree's smaller size could give it less room to negotiate lower rates for funding its real estate purchases.