The stock's total return (stock price appreciation plus dividends) has whipped the broader market, as you can see in the chart below It's also handily beaten the returns of the average REIT, as well as the average retail REIT, as proxied by the two indices shown here.
Here are three top reasons Realty Income stock might be a buy for you.
1. Its dividend: Attractive yield, growth history, and monthly payments
I'd venture to guess most investors are buying REITs primarily for their dividends, as this group tends to be among the higher-yielding dividend stocks, since they must pay out at least 90% of their income as dividends in return for preferential tax treatment.
Realty Income's dividend is currently yielding an attractive 4.3%. One thing to remember, however, is that your effective yield is based upon the price per share at which you buy a stock, not at the current share price. So, assuming Realty Income's price per share and dividend continue to increase over the long term, your future effective yield on Realty Income stock you buy now will be greater than 4.3%.
As for dividend increases, Realty Income has a superb record -- which includes increasing its total annual dividend payout for 23 consecutive years.
Realty Income pays its dividend in monthly installments, rather than in the more typical quarterly ones. For retirees, this payout schedule provides a nice replacement for paychecks from work.
2. Its high-quality portfolio: Tenant focus and lease structure
Diversification within its targeted tenant types is the keyword for Realty Income's portfolio, which consists of more than 4,900 properties. The company has properties in 49 U.S. states and Puerto Rico, which helps insulate it from regional economic downturns. It has 248 tenants across 47 industries, with its largest tenant, Walgreens, accounting for just 7% of total revenue , which helps protect it from challenges arising with any single tenant or within any single industry.
Realty Income's focus on specific types of properties and tenants has allowed it to escape the increasingly difficult physical retailer space and prosper. The company focuses on free-standing properties, which is a big plus, as malls are particularly struggling. It targets tenants that are resistant to economic downturns and direct competition from Amazon.com and other online entities, including retailers that sell low-price-point and/or non-discretionary products, such as dollar stores and pharmacies, and service-based operations, such as movie theaters and gyms.
Its property type and tenant focuses, coupled with its long-term leases, have enabled Realty Income to maintain consistently high occupancies. Its occupancy rate was 98.3% at the end of 2016 and has never been below 96%. The leases are also triple-net, which means tenants pay variable costs, such as property taxes, insurance, and maintenance.
Taken together, Realty Income's tenant and property type focuses and its lease structure result in a very consistent and predicable income stream.
3. Its growth opportunities
Realty Income has a market cap of $15.5 billion and generated revenue of $1.1 billion in 2016, enough to make it the largest publicly traded retail REIT that's focused on free-standing properties. (There are two retail REITs -- Simon Properties Group and GGP Inc. -- that are larger than Realty Income with respect to both market cap and annual revenue; however, both are focused on malls.)
This industry-leading size within its targeted property type provides Realty Income with more resources than its smaller peers to grow by acquisitions. Moreover, the company's investment-grade balance sheet that's rated BBB+ equivalent at all three major ratings agencies provides it with a financial advantage when it comes to acquisitions.
But what about rising interest rates?
Like most REITs, Realty Income's stock began pulling back in the middle of last year because of expectations that the Federal Reserve would increase interest rates. Just as consumers have higher mortgage payments when rates rise, REITs have higher payments to service their debts. The Fed, indeed, has edged up rates twice -- in December and March.
That said, interest rates are still near historical lows, and Realty Income's high-quality portfolio should help better insulate it from the challenges that some of its peers could face.
The best way to build a position in most stocks, including Realty Income, is to dollar-cost average into your full position, rather than buying all your shares at once. This strategy will help you avoid sinking all your money into one particular stock when it's at or near an all-time high.