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Realty Income (NYSE:O) generally raises its dividend on a quarterly basis -- in fact, the most recently announced dividend hike marks the 76th consecutive quarter of growth. So, whether or not Realty Income will raise its dividend in 2017 may seem like a silly question. However, there have been plenty of warnings from market experts lately, predicting a major stock market correction (or worse) in the second half of 2016. With that in mind, let's take a look at how Realty Income could manage to raise its dividend no matter what the market and economy are doing.

Rock-solid retail tenants

Many investors assume anything to do with retail is risky, and who could blame them? After all, several high-profile retailers such as Radio Shack and Aeropostale have declared bankruptcy and many others are struggling to stay afloat.

However, Realty Income's portfolio of properties are hand-selected to be competition-resistant as well as recession-resistant. The vast majority of the portfolio falls into one or more of these three categories:

  1. Service-based businesses -- These are retail businesses that customers have to physically go to. Movie theaters and fitness clubs fall into this category, and LA Fitness and AMC Theatres are among Realty Income's largest tenants. Service-based businesses are inherently immune to competition from online retailers.
  2. Non-discretionary businesses -- These sell products people need, not just things they want. For example, Realty Income's single biggest tenant is Walgreens, and no matter what the economy is doing, people are still going to need prescriptions filled.
  3. Low-price-point businesses -- Dollar General, Dollar Tree, and Family Dollar are all among Realty Income's top 10 tenants, and "dollar stores" are actually the fastest-growing type of retail business. Why? Simply put, they offer discounts that even online retailers can't match. When economic times get rough and people need to cut back on spending, these businesses tend to do even better. The same can be said for discount warehouse clubs such as BJ's and Sam's Club.

To illustrate this point, take a look at Realty Income's 10 largest tenant industries, and how they fit into these categories.

Source: Realty Income Investor Presentation

Leases are set up for consistent, growing income

Realty Income's leases are designed to produce a consistently high occupancy ratio, and to create a predictable, growing income stream.

Tenants sign long-term leases, generally with initial terms of 15 years or more. And, they are "net leases," which means that costs such as property taxes, building insurance, and maintenance are the responsibility of the tenants. Annual rent increases are typically built right into the lease, so the company's rental income rises over time at a predictable rate, as you can see in this chart:

Source: Realty Income Investor Presentation

And, this strategy has resulted in consistently high occupancy levels. As of the most recent quarter, 98% of Realty Income's portfolio is occupied, and more impressively, this level has never dropped below 96%, no matter what the market or economy was doing.

Source: Realty Income Investor Presentation

A rock-solid balance sheet

Realty Income maintains a conservative balance sheet, especially for a REIT. Just 21% of the total capitalization is made up of debt, and even when adding in preferred stock, this figure rises to just 23%. In other words, Realty Income's shareholder equity represents 77% of the total capitalization -- this is the leverage equivalent of obtaining a mortgage with a 77% down payment.

This not only gives the company financial flexibility, but also provides a "profit cushion" if income were to drop unexpectedly.

Realty Income's dividend history

Finally, take a look at Realty Income's dividend history. The monthly payout has been increased 87 total times since the 1994 IPO and the most recent increase represents the 76th consecutive quarter of growth. Over the years, the dividend has grown at a 4.6% annualized rate, and has never been cut in 21 years as a public company. In fact, in the 2009 aftermath of the financial crisis, Realty Income increased its dividend, while the median REIT dividend was cut by more than 25%.

Source: Realty Income Investor Presentation

The prognosis for Realty Income's dividend in 2017

Nothing in the stock market is 100% certain, and crazier things have happened than a solid REIT cutting its dividend. Having said that, not only will Realty Income increase its dividend in 2017, it will increase it four times during the year, and at a rate consistent with its historical dividend growth rate of 4.6% per year. The company is projecting adjusted FFO growth in the 4%-5.8% range, which supports such an increase.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.