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The current retail environment is challenging, to put it mildly. E-commerce players like Amazon are wreaking havoc on many brick-and-mortar retailers. There's been a wave of retail bankruptcies in recent years, and many once-great retail chains like Sears Holdings are struggling to survive.
Realty Income (NYSE: O) and Simon Property Group (NYSE: SPG) are two excellent ways to invest in retail during this difficult time, but for very different reasons.
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Doing well in a tough retail environment
Realty Income is a good pick primarily because of the type of retailers that occupy its properties. Most Realty Income tenants operate in e-commerce- and recession-resistant types of retail. For example, retailers like Walgreens, Realty Income's top tenant, sell things people need, and often in a timely manner. Discount retailers like tenants Dollar General and Walmart offer bargains that are tough for online retailers -- even Amazon -- to match. And finally, service-based and experiential retailers like LA Fitness and AMC Theatres are naturally immune from e-commerce headwinds.
On the other hand, Simon Property Group is a mall REIT and has many tenants that might seem vulnerable. However, Simon is a best-in-breed mall operator and invests heavily in its properties in order to keep up with the changing environment and keep foot traffic flowing through its malls. For example, Simon has been proactively transforming its malls into mixed-use centers, with nonretail elements like offices, hotels, and apartments, which create a natural source of customers. And Simon has been adding more entertainment options and modern dining facilities, often in the spaces formerly occupied by Sears or J.C. Penney stores. Because of this strategy, Simon's sales per square foot actually increased over the past year, despite the challenging retail environment.
Income considerations
One of the primary reasons people invest in REITs is for income, so let's take a look at how these two companies fare in that department.
Realty Income yields 4.7% and pays its dividend in monthly installments. It's difficult to find a stock anywhere in the market with a more impressive track record -- Realty Income has increased its dividend 98 times since its 1994 NYSE listing and has made 578 consecutive monthly payments.
Simon Property Group has a 4.6% dividend yield and makes quarterly payments. While Simon has increased its dividend aggressively in recent years, it doesn't quite have the historical consistency of Realty Income. As you can see in the chart below, the path to the current dividend wasn't straight up, especially around the time of the financial crisis: