Real estate investment trusts, or REITs are a great way to get excellent growth and income in your portfolio. The Realty Income Corporation (NYSE:O) is a particularly excellent long-term investment, not only because of its fantastic dividend record, but the stable and diverse nature of the company's assets.
Why a REIT, and not investment properties?
Now, there might be higher income to be had by simply buying a property and finding tenants, at least in theory. However, the reality is not that simple.
The two main reasons people invest in real estate are income and growth. Generally, we buy investment properties to rent out, which hopefully brings in more money than it costs to maintain the property (income). Also, the value of the property itself may rise over time, producing capital appreciation (growth) in the region's economics allow for it.
There's one big problem with buying individual properties, however. They are simply too risky for most investors. If it takes several months to find a decent tenant, the property sits vacant and you get no income. If you get bad tenants who break their lease, don't pay rent, or damage your property, you could be on the hook for hefty legal expenses, not to mention you'll get no income. There are simply too many things that can go wrong with an individual property.
A REIT lets you take your money and spread it among a basket of hundreds or thousands of properties, with management teams in place to deal with any issues. If a couple of tenants don't pay rent, or a property's value plummets, it will barely affect the overall value of the trust.
Realty Income's portfolio: strength, stability, and diversity
Even compared to other REITs, Realty Income has an impressive and diverse portfolio of properties. The trust owns more than 4,200 properties, which are diversified among 47 industries and 211 companies. In terms of geographical diversity, the properties are spread among 49 states and Puerto Rico. Most of the properties are freestanding buildings in prime locations.
Most of Realty Incomes tenants are on "net leases", which basically means the tenant pays all ongoing operational expenses related to the property (taxes, insurance, maintenance, etc.), and sign lease agreements from 10 to 20 years in length. The trust rents to mostly well-established (low-risk) national companies. A few of the biggest tenants are Texas Instruments, Walgreen's, PNC Bank, The Home Depot, CVS, Regal Cinemas, and FedEx.
The company's properties also have a very high occupancy rate of 98.3%, meaning its properties are in demand and Realty Income has very solid pricing power.
An impressive record of income
Since listing publicly 20 years ago, Realty Income has increased its monthly distributions an impressive 75 times, with the latest representing its 66th consecutive quarterly increase, a very impressive feat considering two major recessions occurred during that time period, not to mention one of the worst real estate collapses in history.
Not only has the dividend grown impressively, but the share price has grown as well, and by an impressive 410%, and has done so pretty consistently. Other than during the massive real estate crash of 2008-09 (which the company has rebounded from and then some), the rise in Realty Income's share price has been almost linear.
In fact, if you had invested in Realty Income 20 years ago and allowed your dividends to compound, your investment would have grown by nearly 1,600%, or an average annual total return of 16.7%. When you consider the S&P 500's 9.4% average total return, it's easy to see how Realty Income could've done great things for your long-term financial goals.
Why you need Realty Income in your portfolio
Consider an example of an investment of $1,000 per year in Realty Income over a 30-year time period. Compounding our returns at an average of 16.7% annually, our total investment of $30,000 would be worth nearly $713,000 after 30 years. Compare that to just $162,000 when compounded at the S&P's average returns.
Now, while past performance is no guarantee of future investment results, consistency is a good thing to bet on for long-term investors.
If a company has historically raised its dividend regularly, chances are better it will do the same in the future. If a company consistently produces excellent returns no matter what the market is doing, like Realty Income has done (look at the early 2000's on the chart when the market was in recession), it gives us a reason to be optimistic for the coming years and decades.
You need the best dividend stocks in your portfolio
The smartest investors know that dividend stocks, like Realty Income, simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.
Matthew Frankel owns shares of Realtyome.. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.