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Better Dividend Stock Sun Communitiesvs. Agree Realty The Motley Fool

Better Dividend Stock: Sun Communities vs. Agree Realty

In the world of real estate investment trusts (REITs), dividend reliability and growth potential are key factors for investors seeking steady income streams. Two prominent players in this space are Sun Communities (NYSE: SUI) and Agree Realty (NYSE: ADC). Both companies have established themselves as dependable dividend payers, but they operate in different niches within the REIT sector, which influences their risk profiles, growth trajectories, and overall appeal to income-focused investors. This analysis delves into a head-to-head comparison to determine which might be the superior choice for those prioritizing dividends. We'll examine their business models, dividend histories, financial metrics, growth prospects, and potential risks, providing a comprehensive view to help investors make an informed decision.

Starting with Sun Communities, this REIT specializes in manufactured housing communities, recreational vehicle (RV) resorts, and marinas. Founded in 1975 and headquartered in Southfield, Michigan, Sun Communities has built a portfolio of over 600 properties across the United States and Canada. The company's focus on manufactured homes taps into a growing demand for affordable housing options, particularly among retirees and lower-income families who prefer the cost-effectiveness and community aspects of these setups. RV resorts cater to the booming travel and leisure sector, especially post-pandemic, where more people are embracing mobile lifestyles. Marinas add a diversified element, serving boating enthusiasts and waterfront property needs.

Sun Communities generates revenue primarily through site rentals, home sales, and ancillary services like utilities and amenities. This model provides a degree of stability because manufactured housing often involves long-term tenants who own their homes but lease the land, creating sticky revenue streams. The REIT has demonstrated resilience through economic cycles, including the 2008 financial crisis and the COVID-19 downturn, partly due to the essential nature of housing. In terms of dividends, Sun Communities has been paying them consistently since going public in 1993. It currently offers a dividend yield of around 3%, which is competitive within the REIT space. The company has increased its dividend annually for several years, qualifying it as a Dividend Achiever with a track record of at least 10 consecutive years of hikes. Its payout ratio, based on funds from operations (FFO)—a key metric for REITs—hovers around 70-80%, leaving room for future increases while supporting reinvestment in growth.

Financially, Sun Communities boasts strong FFO growth, driven by acquisitions and organic expansions. For instance, the company has aggressively pursued mergers and acquisitions, such as its purchase of Safe Harbor Marinas in 2021, which expanded its marina portfolio significantly. This has helped boost its adjusted FFO per share, with recent quarters showing mid-single-digit growth. Debt levels are manageable, with a debt-to-EBITDA ratio in the 5-6x range, which is reasonable for a growth-oriented REIT. However, Sun Communities is not without challenges. The manufactured housing sector can be sensitive to economic downturns, as job losses might lead to higher vacancy rates or delinquencies. Additionally, rising interest rates could increase borrowing costs for expansions, potentially pressuring margins. Environmental factors, like hurricanes affecting RV resorts or marinas, also pose risks, though the company's geographic diversification mitigates some of this.

Shifting to Agree Realty, this REIT operates as a net lease specialist, focusing on single-tenant retail properties leased to high-quality tenants under long-term agreements. Based in Bloomfield Hills, Michigan, Agree Realty was founded in 1971 and has grown its portfolio to over 1,500 properties across 49 states. Its tenants include blue-chip names like Walmart, Tractor Supply, Dollar General, and O'Reilly Auto Parts—companies known for their stability and ability to weather economic storms. The net lease structure is a hallmark of Agree Realty's model: tenants are responsible for most operating expenses, including taxes, insurance, and maintenance, which minimizes the REIT's operational burdens and provides predictable cash flows.

This setup makes Agree Realty particularly attractive for dividend investors seeking low-volatility income. The company has paid dividends without interruption since 1994 and has increased them annually for over a decade, earning it Dividend Achiever status as well. Its current yield is slightly higher than Sun Communities', often around 4-5%, making it more appealing for yield hunters. The payout ratio is conservative, typically in the 70-75% range based on FFO, which supports sustainability and allows for modest annual hikes of 3-5%. Agree Realty's FFO growth has been robust, fueled by strategic acquisitions and development projects. For example, it has a pipeline of ground-up developments and regularly acquires properties from its investment-grade tenants, ensuring a steady influx of high-quality assets.

One of Agree Realty's strengths is its focus on recession-resistant retail sectors, such as discount stores, auto parts, and home improvement—categories that perform well even in downturns. This was evident during the pandemic, when many of its tenants remained operational as essential businesses, leading to high rent collection rates. The company's balance sheet is solid, with a low debt-to-EBITDA ratio of around 4-5x and ample liquidity from credit facilities. This financial flexibility enables opportunistic growth without overleveraging. Risks for Agree Realty include tenant concentration—while diversified, a few major tenants like Walmart account for a significant portion of revenue, so any issues with them could impact performance. Broader retail shifts, such as e-commerce growth, might pressure brick-and-mortar tenants, though Agree Realty mitigates this by selecting omnichannel retailers and properties in strong locations.

Now, comparing the two directly on dividend merits: Both offer reliable payouts, but Agree Realty edges out with a higher yield and a slightly more conservative payout ratio, suggesting better sustainability in volatile markets. Sun Communities provides more growth potential through its exposure to housing trends and leisure sectors, which could lead to faster FFO and dividend increases over time. However, Agree Realty's net lease model offers greater predictability, as leases often span 10-20 years with built-in rent escalators, reducing vacancy risks compared to Sun Communities' more variable occupancy in RV and marina segments.

Valuation-wise, Sun Communities trades at a premium multiple to its FFO, reflecting its growth story, while Agree Realty is often seen as more value-oriented. Investors bullish on demographic shifts—like aging populations boosting manufactured housing and RV demand—might prefer Sun Communities. Conversely, those prioritizing defensive qualities in uncertain economic times could lean toward Agree Realty, given its tenant quality and lower exposure to cyclical swings.

In terms of total return potential, historical data shows both have delivered strong performance. Sun Communities has benefited from the affordable housing boom, with shares appreciating significantly over the past decade. Agree Realty, meanwhile, has compounded returns through consistent dividend growth and share price gains, often outperforming broader REIT indices during market pullbacks.

Ultimately, declaring a "better" dividend stock depends on investor preferences. For pure income stability and yield, Agree Realty stands out as the superior choice. Its net lease focus insulates it from many operational headaches, and its tenant roster provides a moat against economic headwinds. Sun Communities, while excellent, carries a bit more variability due to its sector exposures, making it better suited for growth-oriented dividend investors willing to tolerate some ups and downs. Both deserve consideration in a diversified portfolio, but if forced to pick one for long-term dividend reliability, Agree Realty gets the nod for its defensive posture and consistent execution.

This comparison highlights the nuances of REIT investing, where sector specifics and business models play crucial roles in dividend outcomes. Investors should conduct their own due diligence, considering factors like interest rate environments, which affect REIT borrowing costs and valuations. With both companies poised for continued success, the choice boils down to balancing yield, growth, and risk tolerance in pursuit of dividend excellence. (Word count: 1,128)

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