Is Realty Income's Dividend Boost Here to Stay?

Realty Income has a habit of not only paying a dividend every month, but raising that distribution habitually. Here's a look at whether it can continue that momentum going forward.

Mar 14, 2014 at 2:00PM

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Source: Flickr / Daphne Cholet.

One of the sturdier real estate investment trusts on the market these days, Realty Income (NYSE:O) lifted its dividend earlier this week. Now, we're not talking a massive boost here -- the company scraped off the edge of a penny to add a little over three hundredths of $0.01.Still, an increase is an increase. The question for investors is, can the firm maintain it going forward?

Trademark distributions
Realty Income has obligated itself to pay out at least something on a regular basis. It not only bills itself as "the monthly dividend company," it's gone so far as to trademark that description.  At this point, the firm has earned it -- those distributions have been dispensed every month since the company went public in 1994.

Even after twenty years (whew!), there's no indication that payout is anywhere near in jeopardy. Realty Income had a smashing 2013, with total revenue climbing 58% on a year-over-year basis to $785 million. Adjusted funds from operations, a critical metric for REITs, grew even more, by 69% to $463 million over that stretch of time.

That's given Realty Income more than enough room for the recent dividend increase, the 75th in its history. Doing a little raw math tells us that 75 hikes across since 1994 averages out to nearly four increases annually. True to that number, starting in 1998 the company has made either four or five increases every year.

Safe as houses?
On of the big reasons investors like Realty Income is its habit of steadily increasing that payout. Adding to its appeal is that it's monthly, providing a constant stream of income that keeps rising. 

The company has managed this over a period of decades because a great deal of its take is steady and predictable. It's always favored leasebacks, essentially the buying of property owned by a particular company in which said property is rented out to the occupant by the new landlord. This is a great position for a REIT to be in, as it helps ensure a dedicated tenant who wants to remain in a familiar space. Better, Realty Income tends to operate very long leases, usually in flavors of 10 or 20 year durations.

All that is well and good, but at the end of the day does its distribution compare well to peers in the equity REIT segment? Based on its latest closing stock price, Realty Income's dividend yield is 5.3%. That's more or less in line with another longtime dividend grower (and fellow commercial landlord) W.P. Carey (NYSE:WPC), whose payout yields 5.5%. Realty Income trumps the 4.7% yield of National Retail Properties (NYSE:NNN), however.

Widening our comparison a bit to include specialty equity REITs focused on a particular niche, we can see that Realty Income hangs in there, at the very least. Health Care REIT (NYSE:HCN) -- whose focus is self-evident from its name -- yields 5.5% at the moment, while timberland REIT Rayonier (NYSE:RYN) pays out only 4.2%.

All of those rival REITs, by the way, dispense their dividends on a quarterly rather than a monthly basis.  

Steady as it goes
Realty Income's yield falls pretty much in the middle of the REIT field, beating some competitors while being trumped by others, so it doesn't distinguish itself purely on that basis. A strong argument can be made, however, that the consistency and frequency of its payouts more than make up for this. The company has a tradition and a reputation to maintain, and in the two decades its been publicly traded it has succeeded in keeping both. Its distribution has only moved in one direction -- up -- and that trend looks set to continue. This is one dividend hike that'll not only stay, but probably be repeated again before long. 

Dividends to die for
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Health Care REIT. 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.

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