3 Billion Reasons to Buy Realty Income Corp

Realty Income (NYSE: O  ) calls itself the Monthly Dividend Company. And it's got good reason since it's now paid out $3 billion worth of cumulative dividends to shareholders. And that's just one of the many good reasons to add this real estate investment trust (REIT) to your portfolio.

An impressive history
Realty Income has paid dividends for more than 45 years. Some of that, however, was before it came public in 1994. Since its IPO, though, it has increased its payout 75 times. Better yet, its monthly disbursement has increased every quarter for 66 consecutive quarters. Clearly, Realty Income is a dividend monster.

While that obviously speaks volumes about management, it's also a function of Realty Income's focus. The REIT operates in the triple net lease sector. This area of the market is typified by long leases with small but regular rent increases built in. And the tenants usually pay most of the ongoing expenses for the buildings they occupy, including taxes and maintenance.

O Dividend (Annual) Chart

Essentially, if Realty Income buys good properties it just has to sit back and collect rent. That's why Realty Income didn't have to cut its dividend during the deep 2007 to 2009 financially led recession like many other REITs. It's also why competitors like National Retail Properties (NYSE: NNN  ) didn't cut either.

Almost as good
In fact, National Retail Properties' history is roughly similar to Realty Income's outstanding dividend achievements. National Retail Properties, for example, has increased its dividend for 24 consecutive years. According to the company, less than 0.01% of public companies can make that claim. Not bad.

Both Realty Income and National Retail Properties focus on single tenant properties. That makes buying, selling, and managing buildings easier since the relationship is always one to one. Tenants like the relationship, too, because they have a trusted partner with material scale. There's little risk that the landlord is going to go under and suddenly change a prime location into a legal headache.

Realty Income is the larger of the two with some 4,200 properties. National Retail Properties weighs in at 1,900. Simple math dictates that National Retail Properties' smaller portfolio means it will find growth easier to achieve than Realty Income. It's one reason why Realty Income yields around 5% and National Retail Properties just about 4.5%.

The core of a dividend portfolio
At the end of the day, however, both have enough scale to entice companies with property weighing down the balance sheet to sell. And even if Realty Income's growth is slower, a monthly dividend that gets increased quarterly is a quick way to "replace" a paycheck if that's why you're looking at a dividend payer.

O Chart

Although a 5% or so yield isn't going to make you rich, it is right in line with the rule of thumb 4% withdrawal rate to ensure that you don't run out of money before you die. Better yet, it's a dividend so you aren't actually touching principle, which the 4% rule assumes. Moreover, both Realty Income and National Retail Properties have been stress tested. And they both passed with flying colors where so many others failed.

Using either, or both, of these companies as a core around which to add faster growing companies with lower yields or even higher yielding, but more risky, options will let you sleep at night. And the regular dividend hikes, even if they are small, will help you keep pace with inflation.

It's rare that National Retail Properties or Realty Income go "on sale." The current pricing, however, is fair for what you are getting in return. That said, a yield in the 7.5% range would be an amazing entry point if you don't want to pay full fare. Another recession and/or market sell off might get prices down to those levels. If you are a dividend investor, even if you don't buy today make sure to put this pair on your watch list for the next market downturn.

Top dividend stocks for the next decade
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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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Related Tickers

9/2/2015 10:53 AM
NNN $34.38 Up +0.08 +0.22%
National Retail Pr… CAPS Rating: *****
O $44.11 Up +0.17 +0.39%
Realty Income Corp… CAPS Rating: ****