Diversification within an investment portfolio can provide investors with some downside protection against an entire sector of the stock market experiencing a downturn. While consumer and tech stocks get a lot of the headlines because of their well-known brands and exciting growth stories, exposure to real estate can help a portfolio be well-rounded.
Some investors prefer to get real estate exposure by purchasing investment properties, but for those uninterested in owning a property, there are ways to benefit from the upsides of owning real estate within a portfolio of equities. Realty Income (O 1.38%) is one company that investors should consider. However, before making an investment decision, there are four things to know about Realty Income before adding it to your portfolio.
1. It's "The Monthly Dividend Company"
Many companies pay a monthly dividend, but Realty Income puts it right in the tag line for their company, calling itself "The Monthly Dividend Company." However, this is more than just a slogan. Realty Income has increased its dividend for 29 consecutive years, demonstrating to investors that it is serious about returning capital to its shareholders.
Dividends make a significant difference in shareholder returns. As an example, the purchase of 1,000 shares in 2013 for $37,330 would have been worth $57,420 at the end of 2023 if you only calculated the share price appreciation over that period. Include the dividends, and it adds another $28,430 of returns.
2. Realty Income is a REIT
One of the reasons that Realty Income makes a big deal about its monthly dividend is that the company is structured as a real estate investment trust (REIT). This classification means that Realty Income is required to distribute at least 90% of its taxable income as dividends to its shareholders.
This distribution requirement provides a little more certainty to investors that the dividend is here to stay. That said, there are circumstances where it could be paused (this happened to some of Realty Income's peers during the pandemic) but in general, REITs can be counted on for dividend income.
3. There's potential momentum in years ahead
Rising interest rates have had an impact on every business. For a company like Realty Income, there could be a benefit in the coming years. Many companies are currently paying off debt at very low interest rates. The next time these businesses need to tap the debt markets, interest rates will be much higher. This increases the attractiveness of a type of sale called a sale-leaseback transaction.
Put simply, a sale-leaseback transaction is when a company sells its property and then leases it from the purchaser. This could be a win-win for both Realty Income and a potential partner. Realty Income would be able to acquire and lease back new properties, while the sellers of the properties would have additional capital on its balance sheet from the transaction.
4. Realty Income has a well-diversified portfolio
A severe recession can be a potential risk for a company like Realty Income. If its customers experience business declines and can't pay their rent, Realty Income will feel the impact.
To combat this, the company has diversified its portfolio in a way that should insulate it during an economic downturn. Indeed, 29% of Realty Income's properties are grocery stores, convenience stores, and dollar stores. While these industries could certainly feel an economic slowdown, they should be more resilient than discretionary industries like entertainment. Realty Income estimates that 89% of its total rent is resilient to economic downturns.
Realty Income is also diversifying internationally as well -- 13% of its rent comes from the United Kingdom, and the company has invested approximately $10 billion in real estate in Western Europe since 2019. Including the United Kingdom, 15% of the total annual rent comes from Western Europe.
So is Realty Income a buy?
For many investors, finding high-quality REITs is the easiest way to gain exposure to real estate in an investment portfolio. When considering REITs, Realty Income is an attractive choice. The company has a long track record of success (it has averaged a compound annual return of 14% since its IPO), and its commitment to increasing its dividend means shareholders can expect their stake to grow in value over time.
