How Realty Income Corporation Paid Out $3 Billion of Dividends

This week, Realty Income (NYSE: O  ) announced it had surpassed the $3 billion mark in total dividends returned to shareholders. And there's one essential way it has managed to raise its dividend for 66 quarters in a row that often goes undiscussed.

The massive dividend payouts
In the announcement of passing $3 billion in dividends, the CEO of Realty Income said:

We are pleased with the company's consistent performance that has allowed us to pay over $3 billion in monthly dividends to our shareholders...we remain committed to operating our company in a manner that supports the payment of monthly dividends to our shareholders.

And a simple glance at how its dividend has risen over the last 20 years shows the remarkable growth:

Source: Company Investor Relations.

How it does so
So how has it so steadily risen its dividend through the years? Many people know one way is through acquisitions, as its real estate assets have ballooned from $339 million in 1994 to $9.3 billion at the end of March. The biggest jump came just last year when it acquired nearly 975 properties worth $4.7 billion: 

Source: S&P CapIQ.

But it turns out there's another way it boosts its dividend. The company's latest annual report noted plainly: 

We seek to increase distributions to stockholders and funds from operations, or FFO, per share through both active portfolio management and the acquisition of additional properties.

Acquisition of additional properties is easy to spot and understand. But active portfolio management is a bit more of a mystery. So let's examine what that means.

Active portfolio management
The portfolio management department of Realty Income is run by Richard Collins, who has been with the firm since 1990 and previously headed up the acquisitions group. So he knows a thing or two about seeking to increase the FFO that dividends are paid from. 

But what exactly does that portfolio management do? Let's check back in the annual report:

  • Contractual rent increases on existing leases;
  • Rent increases at the termination of existing leases, when market conditions permit; and
  • The active management of our property portfolio, including releasing vacant properties, and selectively selling properties, thereby mitigating our exposure to certain tenants and markets.

While it may be less glamorous than headline grabbing property acquisitions, portfolio management is the critical business function of a REIT to ensure properties are well maintained and continue to deliver topline results.

It examines both the broader performance of industries in which its tenants operate -- 47 separate ones at last count -- and it also monitors "the operation, management, business planning, and financial condition," of the individual tenants themselves.

Although the numbers aren't as large -- it expects $50 million in proceeds this year -- it also sells the assets Realty Income no longer needs. It will in turn use the money generated to invest in other properties that will likely yield higher returns, but also help eliminate the risks of become too concentrated in particular areas or industries.

The key takeaway
There's a lot to like about Realty Income, but a critical part of investing is understanding not only the glamorous aspects of a business -- like big acquisitions for REITs -- but all parts of it. And when you consider how well Realty Income has operated through the years, there's no doubt that while it may not be pretty, its portfolio management function has been one key to its success.

Are REITs the top dividend stocks for the next decade?
Dividends like those offered by Realty Income can be great things, as the smartest investors know dividend stocks simply crush their non-dividend paying counterparts over the long term. 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.

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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8/31/2015 4:06 PM
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Realty Income Corp… CAPS Rating: ****